The U.S. Treasury Department labelled China as a ‘currency manipulator’, after the country’s central bank allowed the currency to decline amidst the ongoing trade.
On August 5th, Trump Tweets;
According to Trump, he wanted the Chinese companies to cut the price equal to the tariffs to keep their customers unaffected. In other words, he wanted the Chinese companies to bear all the cost of the tax. If that is the case, these companies with their already discounted price products will have an add on of import tax.
Benefit for the U.S. out of such a move:
- Federal Government will have more revenue.
- The American consumers are left unharmed.
- Cut the Chinese competition by squeezing them with all the taxes.
So far, the Chinese companies were imposing all the tariffs on American consumers, because with already low margin products, they had no room for a discount.
The People’s Bank of China on August 5th made a psychological move by allowing its currency to decline in value below 7 yuan against the American dollar. It is the first time after 2008 that the value of yuan has dropped this low. The move was considered as a retributory action against U.S. President Donald Trump’s vow to impose 10% tariff on $300 billion of Chinese goods.
The drop in the value of yuan shook the stock market, and U.S. stock index fell almost 3% on August 5th. This will only intensify the trade war between two of the world’s largest economies.
Since April the yuan’s has been depreciating, to an extension of 5%. Any goods priced in yuan have become cheaper in dollars, which indeed meet Trump’s requirement of making tariffs painless to American consumers. He also wanted Americans to realise that they are paying more for Chinese products and should switch to American products. By reducing the yuan’s buying power relative to the dollar’s, it made the Chinese poorer and Americans richer.
However, it turned out to be problematic for Trump. With the depreciation, China can now hang on to U.S. share market. As a result, Trump could fall short of his goal of bringing factory jobs back to the U.S. on a massive scale.
The Chinese government has been unfairly suppressing the value of yuan to get a competitive advantage. In recent year, the Chinese government supported the yuan against market forces that would drag it lower. The reason for the sudden decline of yuan on August 5th was that the Chinese government briefly stopped manipulating. This agitated the U.S. Treasury and made them label China, a ‘currency manipulator’.
Let me bring a clear picture before you; Trump has stated out the truth. China has been manipulating with trade by protecting domestic companies from competition. It also forced the U.S. and other foreign companies to surrender their intellectual property as the price of admission. But if we evaluate Trump’s strategy towards this, was it right?
Well, the most critical number in the financial world for the next few weeks will be the dollar-yuan exchange rates. The People’s Bank of China on August 6th set its daily fixing for the yuan at under 7 to the dollar.
Moreover, It also declared plans to sell yuan-denominated bonds in Hong Kong. This step indeed would absorb the yuan held outside the country and make it harder for traders to borrow the currency.
Currently, the trade between both countries is worsening. The American exporters, especially the farmers, have to face the wrath of this situation as China has halted the purchase of U.S. farm goods. On the other hand, Trump stated that he would give aids to the farmers and would not let them suffer.
Traders are in the hope that the Chinese government would take necessary measures to bounce back into the global market. However, in reality, a trade conflict between the two economic forces would not be suitable for anyone.