How China’s Currency Could Help It Weather a Trade War, at a Cost

How China’s Currency Could Help It Weather a Trade War, at a Cost

Ads by Revcontent

Devaluations carry a legion of risks, though.

First, it’s not clear the extent to which China might need to let its currency weaken. The decline of the past three months has potentially benefited all of China’s exports to the United States, which last year totaled over $500 billion, and partially offset the impact of the tariffs imposed so far. The United States’ first tariffs on $34 billion of Chinese goods, which took effect this month, are set at 25 percent.

Other tariffs proposed by Mr. Trump, on a larger value of goods, would be set much lower at 10 percent. But Chinese policymakers would likely want to avoid a situation in which investors and others believed the level of the currency was directly affected by developments in the trade war.

And a big slide could hurt China.

A nose-dive in the renminbi would come at a difficult time for the Chinese economy. A dizzying rise in borrowing has driven a considerable portion of China’s growth. The government, fearing that some borrowers will have problems repaying the debt, has tried to restrain borrowing. But such limits can also slow the economy, which is why some constraints were recently loosened.

Fears about China’s debts were on the rise in 2015 when the government carried out a surprise devaluation.

Individuals and companies in China dumped renminbi and bought other currencies, to protect their wealth against further decreases in the value of the Chinese currency. The selling, known as capital flight, suggested that the Chinese had little faith in their own economy, and raised questions about the Chinese central bank’s handling of the devaluation. The other big fear at the time was that the prices of Chinese goods in other countries would fall, forcing producers there to also cut their prices and hurt the wider economy in the process.

China imposed new “capital controls” that stanched the capital flight, and a pick up in the global economy and prices alleviated the concern about cheaper Chinese goods. The added controls and the fact that the global economy is in somewhat better health may allow China to do another devaluation without creating as many jitters. But it would still be a hard task to carry out, in part because individuals and firms find ways around the rules.

“Carrying out a controlled depreciation is one of the most difficult maneuvers a central bank can pull off,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “China, through using capital controls and its reserves, could pull it off again, but there is a risk that a weaker currency is taken as evidence that China can’t assure financial stability.”

(Original source)

Ads by Revcontent
If the Trade War Starts to Damage the Economy, Here’s How You’ll Be Able to Tell « Previous If the Trade War Starts to Damage the Economy, Here’s How You’ll Be Able to Tell
Next » DealBook Briefing: A Favorite Trump Bank Questioned Over Kushner Credit DealBook Briefing: A Favorite Trump Bank Questioned Over Kushner Credit