US-China Trade War Could Lead to Yuan Depreciation

US-China Trade War Could Lead to Yuan Depreciation 

According to International Monetary fund, the recent weakening of the Chinese yuan is not a big issue. They have advised that if the US-China trade war continues, Beijing must allow the currency to drop further.

Leading to an extended damage of the world’s largest economies and weighing further on global growth, the Chinese yuan dropped to the lowest in the past 11 years against the US dollar.

The Hong Kong protests have also aggravated the drop of yuan, also known as renminbi, as shops remained closed for nearly a week. The drop in sales and revenue will leave a long term impact on the overall annual earnings of the manufacturers and the Chinese economy at large.

A Hong Kong based economist for Spanish bank BBVA, Xie Le, commented that the protests in Hong Kong have strongly impacted the local economy. He said that the retail and tourism businesses that take yuan as a payment method from visitors in mainland China have greatly suffered.

The exchange rate for yuan began falling months before the Hong Kong protests started. At the end of June, deposits in the city sank to a three-month low of 604 billion yuan (US$84 billion).

Reaching its lowest since February 2008, yuan fell in early trade to 7.15 per dollar. This is its second biggest one-day drop of the month. Before regaining some ground to around 7.1595, the offshore yuan fell to a record low of 7.1850.

With the US-China trade war gaining momentum, the Chinese authorities have let the yuan slump by nearly 3.6%, further increasing the possibility of a global trade war. It was trading around 7.1419 by 0330 GMT.

Giving reasons for the drop of yuan in a note on Tuesday, analysts at UBS said that even though US tariffs on imported Chinese goods have disturbed the Chinese economy, Beijing is going to ensure that the decline in yuan is “both controlled and limited”.

Over the next three and sixth months, yuan will weaken to 7.4 per dollar and by the next 12 months a drop of 7.3 per dollar will be witnessed.

Mitul Kotecha, a senior emerging markets economist at Toronto-Dominion Bank, recently told Bloomberg news, “The gloves are coming off on both sides and as such yuan depreciation is an obvious cushion against US tariffs”. He added, “As long as China can ensure that yuan weakness is well controlled, i.e. it does not provoke strong outflows, expect to see further depreciation in the currency.”

Carie Li, an economist at OCBC Wing Hang Bank, said, the US-China trade war has slowed down trade flows between the world’s two largest economies, and this, in turn, has hurt cross-border yuan payments”.

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