The escalation of the U.S. China trade war to a new level has pushed China’s yuan currency to its lowest point, causing uneasiness among Trump’s policy makers and trade advisers, calling Beijing a currency manipulator.
That is mainly because Trump’s 10% tariff, if it forges ahead, will be imposed on Chinese imports that will yield less than the amount expected as tax revenues… Chinese goods will become even more affordable, to which U.S. consumers will hardly feel the brunt of buying China-made products.
A lower US Dollar to Chinese Yuan exchange rate technically offsets the effect of the tariffs imposed on China goods. This will encourage more buying of China-made goods not only in the U.S. but throughout the globe as well. China on the other hand, made a previous move to suspend all procurements of all goods coming from the U.S. A move that protects China from trading at higher costs in light of the higher exchange value when converting Chinese yuan to the U.S. dollar.
It is a move that is generally frowned upon because it results to unfair trading advantage on a global scale.
Why is Manipulation of Currency Possible for China?
Unlike currencies used for trading by other countries, the Chinese yuan is not freely traded, to which the Chinese government has the power to limit the yuan’s movement against global currencies. Such being the case, the seat of power in Beijing can order the devaluation of the yuan versus the U.S. dollar.
The People’s Bank of China (PBOC) which is not an independent government sector was apparently ordered to devalue the yuan as a trade protection measure against Trump’s impending tariff increase effective September 01, 2019 onwards
Julian Evans-Pritchard, the Capital Economics Senior China Economist said that by devaluing the yuan amidst Trump’s latest ‘s tariff threats, the Chinese government through the PBOC has “effectively weaponised the exchange rate, even if direct intervention is not proactively weakening the Chinese currency.”
Peter Navarro, Trump’s trade advisor is voicing a warning that the U.S. intends to act forcefully by taking strong actions against Beijing; but without specifically stating what the strong actions will be.
After echoing similar promises made by Trump to U.S. farmers, and foretelling that China’s economy will suffer more, Navarro eventually said that the White House will again call back Chinese negotiators to the U.S. for another round of trade talks.