Protective instrument: why China lowered the yuan to a minimum in two years

On Tuesday, August 23, the People's Bank of China lowered the country's national currency to a record low of 6.85 yuan per dollar.

Previously, a similar value could be observed back in September 2020.

Since the beginning of spring 2022, the Chinese central bank has weakened the currency by more than 8%.

Analysts interviewed by RT attribute the actions of the regulator to the intensification of the trade confrontation between China and the United States.

“The People's Bank of China is depreciating the yuan in many respects in order to increase the competitiveness of Chinese goods in the world market, to make them cheaper for consumers.

This is especially true now, in the context of the economic and political confrontation with the United States, ”said Natalia Milchakova, a leading analyst at Freedom Finance Global, in an interview with RT.

It should be noted that relations between Beijing and Washington began to deteriorate against the background of the problem around the status of Taiwan.

In early August, the island was visited by Speaker of the House of Representatives Nancy Pelosi, who occupies the third most important position in the state hierarchy of the United States.

She became the first US official of this stature to pay an official visit to Taiwan in 25 years.

The Chinese authorities expressed a note of protest and said that such a move violates the principle of one China.

Later, the republic began a series of exercises in the area of ​​the island and suspended cooperation with the United States in some areas.

Beijing also announced sanctions against Pelosi and her immediate family.

In addition, the Chinese authorities threatened Washington with "serious consequences."

According to experts, China may use the yuan exchange rate as one of the tools of economic pressure on the United States.

The Asian republic followed a similar strategy during the trade war with the United States, which began in 2018.

Then Washington accused Beijing of illegally obtaining American technology and raised duties on Chinese goods imported into the country.

China has taken retaliatory measures.

Following a series of negotiations in May 2019, the United States began to aggravate the conflict: in addition to imposing new duties, American technology companies began to stop cooperation with Huawei.

In August, the states once again failed to reach a compromise on the terms of the tariff agreement, and since September they have introduced new mutual restrictions.

After that, the parties again returned to the discussion of a truce and signed a trade deal on January 15, 2020.

However, at the moment, the United States is unlikely to go into open economic confrontation with China, since the administration of the incumbent President Joe Biden is less competent in the intricacies of waging a trade war compared to the team of Donald Trump.

Alexander Razuvaev, a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers, shared this opinion in a conversation with RT.    

“Now the Democrats are in power, for whom politics is more important than the situation in production and in general in the US economy.

At the same time, the idea of ​​​​returning production from China to the United States and the struggle for world markets for the sale of products, which was actively promoted under Donald Trump, completely failed.

They do not pay attention to their national market and try to solve economic problems only with the help of monetary policy,” the expert emphasized.

At the end of July, the US Federal Reserve raised its interest rate by 75 basis points to 2.25-2.5% per annum.

Since the beginning of the year, the American regulator has increased the rate for the fourth time, although before that it had kept it near zero for almost two years.

Thus, the authorities are struggling with high inflation, the level of which in July reached 8.5% in annual terms.

The growth rate of consumer prices for goods and services in the country became the highest since February 1982.

“Things are not so simple with the real sector of the US economy, the US economy is experiencing difficulties, as can be seen from the statistical data.

Against this background, the dollar itself and dollar-denominated assets are no longer a “safe haven” for investors,” added Natalia Milchakova.

Debt Pyramid

In July, China reduced investments in US government bonds (treasuries) to a record low level over the past 12 years, according to data from the US Treasury Department.

According to the latest report from the department, in June 2022, the volume of Chinese investment in United States Treasury securities decreased by $13 billion to $967.8 billion, the value was the lowest since 2010.

In addition to China, the main US creditors at the moment are Japan (the country has invested $1.236 trillion in treasuries), Great Britain ($615 billion), Luxembourg ($306.8 billion), Cayman Islands ($300.4 billion), Switzerland ($295.3 billion) and Ireland ($285.1 billion).

Treasury Treasuries are debt securities guaranteed by the US government.

States buy securities and receive a stable income from them.

In other words, government bondholders are lending their money to the economy of the United States.

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• ©Michael Macdonald / EyeEm

China began to systematically reduce investments in US public debt back in 2019.

At that time, Beijing was selling US bonds in order to redirect money to support domestic demand and the national currency, analysts recall.

Now, one of the reasons for the sale was the tough anti-Russian sanctions of the West, says Nikolai Vavilov, a specialist in the Strategic Research Department at Total Research.

Since the end of February 2022, the United States, the EU and a number of other countries have continued to introduce ever new economic restrictions against Moscow.

In particular, the restrictions affected the gold and foreign exchange reserves of Russia, which were placed outside the Russian Federation.

In total, Western states managed to freeze almost $300 billion.

“China really has concerns about the possible blocking of funds, so Beijing is gradually withdrawing them from US securities.

As for the remaining investments, China may use the asset as a tool to contain the US in Taiwan.

A sharp dumping of bonds by China means problems for the American financial system,” Vavilov said.

Under the current conditions, other states may follow the example of the Asian republic and stop investing in the US economy, Alexander Razuvaev believes.

According to him, in the near future, the countries of the Middle East will withdraw money from the public debt.

“There has already been a similar precedent - after the unflattering statements of George W. Bush regarding Saudi Arabia.

In response, the Saudis abruptly began to throw off treasuries, which had a negative impact on the US stock market.

So they have experience.

The situation with Russia clearly demonstrated that American politicians cannot be trusted, and undermined investor confidence in the dollar as a reliable way to save money.

Therefore, all countries will gradually get rid of the dubious asset,” Razuvaev said.

According to the expert, with a further decline in global demand for US government bonds, over time, there will no longer be enough money to finance the budget deficit.

In such a scenario, the presidential administration will have to cut funding for military and social programs.

To replace foreign investment, the authorities may start printing more dollars, but such actions will lead to hyperinflation and even more serious problems in the US economy, Razuvaev concluded.