China Feeling The Trade War Pain
China’s devaluation of the yuan is an acknowledgement that President Trump’s tariffs are having an impact and that the Chinese economy is in trouble. How far the trade war between China and the United States will escalate still remains uncertain.
In reaction to Trump threatening more tariffs, the Chinese devalued the yuan by more than 1.9%. The yuan broke through an important barrier of seven yuan to the US dollar, its lowest value since 2008. Analysts are predicting that this is not the end of the decrease in value and expect that the currency could drop below 7.30 yuan to the dollar by the end of this year and 7.50 yuan to the dollar by the end of next year. In response, the US Treasury has called China out for being a currency manipulator and is asking the International Monetary Fund to investigate.
The reasons for the devaluation are two-part, the obvious one being the escalating trade war between the US and China. Last week, President Trump threatened to extend US tariffs to virtually all Chinese imports, which would cover $300 billion in Chinese products. This would be in addition to the $250 billion tariffs that Trump already imposes on China. This significantly hurts China because 20% of their GDP is made up from exports. Thus, the Chinese deliberately lowered the value of their currency in order to offset the current and future tariffs.
The more obscured part of the yuan’s devaluation could be a result of China’s economic slow-down. It is no secret that China’s growth rate has been steadily falling since 2010, where it had a growth rate of over 12%, which is significantly more than the 6.2% growth they reported in the first half of 2019. In order to help the issue, China may have decreased the value of their own currency and hid behind Trump’s tariffs as their reason to do so. If China’s economy is getting weaker then demand for the yuan is falling. It would then make sense for China to lower the value of the yuan as a way to counterbalance the diminished demand.
According to Gerald Seib, executive editor for the Wall Street Journal, there are three possibility outcomes for the future. The first is that there will be a huge trade war between the US and China, which is highly unlikely considering this would seriously damage both countries’ economies. The second is that there is progress occurring where a deal could happen later this year. The final outcome is that China is waiting for a new president in the US to make a deal with. It is impossible to say which outcome will happen, but China is in trouble in the meantime.
Written By Willie Turchetta, Edited by James Mueller & Alexander Fleiss