Increasing U.S-China Trade Tensions And Declining Yuan's Unforeseen Impact
U.S. President, Donald Trump, threatened to slap China with more tariffs a few days ago, post the recently failed attempts at trade negotiations between the leaders of the two countries.
Analysts and investors believe that the tariff threat is a sign of continued tensions between China and the U.S, and this thus the Yuan sell-off. The Chinese Yuan kicked off this week on a bearish trend with its value dropping below 7 Yuan per Dollar. The last time that the currency dropped past that level was more than a decade ago.
President Trump accuses China of currency manipulation
"China dropped the price of their currency to an almost historic low. Are you listening to the Federal Reserve? This is a major violation which will greatly weaken China overtime!" stated Trump in a tweet.
China has previously implemented measures aimed at making sure that the value of the Yuan does not go beyond 7 Yuan per dollar. However, this time, it seems to have loosened its policy, a move that has placed more pressure on the U.S.
Why China does not mind letting the Yuan slip
China vowed to retaliate to President Trump's threats to slap China with more tariffs. Allowing the Yuan to grow weaker against the Dollar is a move that might be aimed at weakening the extra tariffs on Chinese produce.
Trump's administration is opposed to China's move to weaken its currency because it puts Chinese exporters at an unfair advantage.
China might have let the currency lose value, thus leveraging its country as an effective weapon in the trade war with the U.S.
However, it is also in the interest of the Asian country to make sure that the currency does not fall further. This is because weakening the Yuan might also hurt the Chinese economy.
The Yuan is currently trading slightly above 7 Yuan per Dollar, and analysts are convinced that this is a sweet spot for the Chinese government's retaliation efforts.
The weaker level means that Chinese manufacturers will still get a significant amount of money back after selling their goods to the U.S. even after the extra tariffs imposed by President Trump.
Will Trump take more action against China?
The weaker Yuan not only undermines the extra tariffs by the U.S. but it also forces U.S. manufacturers to lower their prices to maintain their competitiveness in the international market.
China's decision to weaken its currency has clearly undermined and angered President Trump, but now the world is curious about the U.S. president's next move.
Trump might encourage the Federal Reserve to weaken the US dollar to counter China's currency strategy. POTUS noted in July that weakening the US currency was still an option that his administration might opt to exercise.
However, Larry Kudlow, the White House economic adviser, stated on Friday that Trump's administration would not go down that road.