The Chinese yuan rate at the auction on August 5 fell to its lowest value since February 2008. For the first time in more than 11 years, the Chinese currency has reached the psychologically important level of 7 yuan per US dollar for the financial market.

The weakening of the Chinese currency occurred against the backdrop of another aggravation of trade relations with the United States. Earlier, Donald Trump said that from September 1, Washington will introduce new 10% duties on all remaining imports from the PRC, not previously affected by the tariff war of the two states. We are talking about Chinese goods totaling $ 300 billion.

Economists believe that the weakening of the renminbi is Beijing’s retaliatory move towards new restrictions from the White House. Thus, Julian Evans-Pritchard, senior economist for China at Capital Economics Ltd, called the depreciation of the national currency of China the most powerful means of counteracting new duties, stronger than stopping the export of metals or selling US government bonds, reports Reuters.

Due to the devaluation of the renminbi, China will be able to reduce the price of its exports, said Andrei Lyushin, deputy chairman of the board of Loko-Bank CB, in a conversation with RT. The expert explained that in this way Beijing expects to increase the attractiveness of its products and put pressure on competitors. Liushin also believes that it is now in the interests of the PRC to leave the national currency rate at the current level.

“The exchange rate of the Chinese currency has broken through the psychologically important level of 7 yuan per dollar, and now, with the escalation of the trade war and the absence of a trend of long-term Fed rate cuts, the yuan has no reason to leave this zone. The currency will be kept in this range, firstly, due to the systematic sale by China of the American public debt, and secondly, due to the artificial maintenance of the current level by the PRC authorities, ”said Andrey Lyushin.

China - the largest holder of US government bonds in the world - is gradually reducing its investment. In May, the volume of the US public debt in the reserves of China decreased by almost $ 3 billion - to $ 1.11 trillion. This is evidenced by the data of the American Ministry of Finance. The value was minimal since May 2017.

China is also on the list of the largest trade partners of the United States, while exports from China to the United States significantly exceed imports. In June, the difference was $ 30.2 billion. This is more than half of the United States total trade deficit, which is $ 55.2 billion. The US Department of Commerce cites such data.

The head of the HSE School of Oriental Studies, Alexei Maslov, in an interview with RT noted that a cheap yuan could further increase the trade imbalance in favor of Chinese goods, since it makes American goods more expensive and therefore less attractive.

The expert believes that this is why the White House perceived the depreciation of the renminbi as an unfriendly move on the part of Beijing.

Donald Trump has already called the actions of the PRC a serious violation and currency manipulation. The President of the United States wrote about this on Twitter.

Alexei Maslov believes that further weakening of the Chinese currency will not follow, since such a move could cause criticism of the government already within the country. According to the economist, by the end of the year the yuan will be in the range of 6.9-7.1 per dollar.

  • Reuters
  • © Leah Millis

The benefits to the economy

Experts interviewed by RT note that the weakening of the renminbi can support the Chinese economy by increasing the attractiveness of Chinese goods and increasing exports. The fact is that for the final foreign consumer, products from the PRC will be cheaper in terms of dollars.

Alexei Maslov explained that the depreciation of the renminbi will allow Beijing to increase trade not only with the United States, where import duties remain a barrier to goods, but also with the countries of Southeast Asia, to which China now switches its main trade flows. The expert noted that China is conducting serious negotiations on creating a comprehensive Asian economic partnership, which can include all ASEAN countries (Indonesia, Malaysia, Singapore, Thailand, the Philippines, Brunei Darussalam, Vietnam, Laos, Myanmar, Cambodia), as well as South Korea, Japan and India.

“This could become a large economic region in which China expects to play a dominant role. The main question is what currency will become the main one for trading in this zone. I believe that China is preparing the yuan for this role and is striving to make it more attractive to other countries. For this, the national currency must first weaken, which Beijing is doing, ”said Maslov.

Alexei Maslov noted that China plans to “restart” its trade with other countries. In previous years, it provided up to 40% of GDP, but now the share of foreign trade has decreased to 25%. A 5-10% increase in foreign trade compensates for almost all the losses that China suffered in the trade war with the United States, Maslov is sure. The expert believes that in 2019, the Chinese economy will be able to show growth of at least 6.3%.

In the second quarter of this year, China's GDP grew by 6.2% compared to the same period last year. Such data are provided by the National Bureau of Statistics of the PRC. This is the lowest increase in 27 years.

The head of BCS Broker investment department Narek Avakyan in an interview with RT suggested that the growth of the Chinese economy will decrease compared to 6.6% in 2018 and will reach 6.2-6.3%. The following year, the expert allowed the acceleration of the Chinese economy to 6.5%.