The Number 7 Could Make China’s Currency a Trade-War Weapon
BEIJING — As the United States in addition to China swap threats in addition to mete out increasingly punishing tariffs, the planet is actually watching to see whether Beijing turns to one of its most potent economic weapons. that will involves the number 7.
China’s currency, the renminbi, has been gradually losing value since mid-April, in addition to on Tuesday that will was at its weakest point in a decade. If the currency weakens any further, that will could fall below the psychologically important level of 7 renminbi to the dollar. The last time that will took more than 7 renminbi to buy a dollar was in May 2008, as the planet was slipping into a financial crisis.
The Trump administration doesn’t like the idea of a weaker Chinese currency. that will could give what that will considers an unfair advantage to China’s exporters. from the arsenal of trade disputes, currencies can be potent weapons.
nevertheless China has Great reason to keep its currency by weakening, in addition to that will appears to have acted in recent weeks to prop that will up. Currencies may be potent weapons, nevertheless they are blunt ones — in addition to they can boomerang against those who use them.
What happens if the renminbi falls past 7 to the dollar?
There is actually nothing particularly threatening about the number 7 itself. The renminbi at 7.002 to the dollar is actually pretty similar to the currency at 6.998 to the dollar.
nevertheless passing that will number would certainly be significant symbolically. that will would certainly suggest China is actually prepared to let its currency weaken further still. that will would certainly give China’s factory owners an advantage when they sell their goods from the United States. that will would certainly also undermine the tariffs the Trump administration has levied on more than $250 billion in Chinese-made products.
How would certainly that will help China?
Say you own a Chinese factory doing lawn ornaments, in addition to you sell a lot of pink flamingos to an American retailer. You cost each at $1 — they may sell for far more from the United States, nevertheless shipping in addition to storage account for most of that will. When the renminbi is actually 6 to the dollar, that will translates to 6 renminbi in sales.
nevertheless when the currency depreciates to 7 to the dollar, that will $1 flamingo is actually worth 7 renminbi in sales to you. Or you can cut the cost — say, by $1 to 85.7 cents — in addition to still make your original 6 renminbi in sales. Your American competitor, who has to buy in addition to sell in dollars, has to grudgingly cut prices to compete.
(that will’s a lot more complicated from the real world. The plastic in addition to metal for the plastic flamingo may have been imported to China in addition to are priced in dollars. nevertheless bear with us.)
A weaker currency can also help Chinese exporters beat President Trump’s tariffs. Right today, the United States imposes tariffs of about 10 percent on a wide variety of Chinese goods that will arrive at an American port. If the renminbi has fallen 10 percent, the tariff is actually basically nullified.
What’s driving the decline?
Some politicians from the United States in addition to elsewhere have long said that will China manipulates its currency, even though Washington officials — including from the Trump administration — have stopped short of official accusations. nevertheless in This kind of case, many of the forces weakening the currency are beyond Beijing’s immediate control.
China’s financial system is actually firmly controlled by the government, giving the country’s leaders a great degree of control over how much the renminbi is actually worth. Officials set a daily benchmark rate for the renminbi in addition to allow its value to move a smidgen above or below that will level in currency markets. Chinese officials say each day’s trading activity helps determine the value they set for the renminbi the next day, nevertheless they disclose few details about how that will works.
On Tuesday, Beijing set that will guidepost at 6.9574, just a hair’s breadth stronger than 7. from the planet of foreign exchange, a higher number means a weaker currency.
Right today, traders are sending Beijing just one message: The renminbi should be worth less. The people in addition to companies that will hold the currency have become increasingly nervous about China’s slowing economic growth, slumping stock market, fragile real estate market in addition to seemingly intractable trade war with the United States. Inflation has begun to tick upward, in addition to rising prices tend to make holding the relevant currency less attractive.
There are some other reasons. Since late July, Beijing has tried to prop up the economy by having the state-controlled banking sector increase lending, doing money more available. that will means even more renminbi sloshing around, weakening the currency’s value.
While China hasn’t raised interest rates, the Federal Reserve in Washington has. that will makes that will attractive for many people to sell their renminbi in addition to buy dollars. would certainly you rather have a one-year renminbi certificate of deposit that will pays 1.5 percent interest today, or a one-year dollar C.D. that will pays out 2.6 percent or more?
is actually the drop deliberate on Beijing’s part?
Not quite. If anything, Beijing is actually trying to keep the renminbi by falling too fast.
China has quite a few ways to bolster the currency’s value. One option is actually to follow the Fed’s example in addition to raise interest rates. that will would certainly give Chinese families in addition to companies more incentive to keep their money in China. nevertheless that will would certainly raise the cost of borrowing in China, just as the economy is actually slowing.
Beijing could buy up its own currency instead. Like anything else, the renminbi’s value rises when that will is actually scarcer.
Thanks to the way that will has managed its currency over time, China has amassed the planet’s largest foreign exchange reserves — a $3 trillion stash of money that will keeps in dollars, euros, pounds, yen in addition to some other currencies. that will has begun to tap that will stash. When China’s central bank released its monthly balance sheet a week ago, that will showed a drop of almost $20 billion in foreign currency just during September.
“Selling almost $20 billion in a month won’t break the bank,” said Brad W. Setser, an economist at the Council on Foreign Relations in brand new York. “nevertheless that will does indicate the direction of current market pressure.”
What are the broader risks?
Three years ago, as its economy slowed, China devalued the renminbi in part to give its factories a helping hand. The financial world was shocked. Markets plunged.
As Chinese officials hurried to explain themselves, people in addition to companies began shifting their money — money that will China’s economy needed — outside the country. A year later, China had spent more than $500 billion by its reserves in an effort to shore up the renminbi. that will later tightened controls on the financial system to shut off many ways people used to get money out of the country.
Should the trade war intensify, China may look to make more aggressive moves with its currency. nevertheless as history shows, there can be a cost to pay.