January 17, 2019

The Number 7 Could Make China’s Currency a Trade-War Weapon

A weaker currency can also help Chinese exporters beat President Trump’s tariffs. Right now, the United States imposes tariffs of about 10 percent on a wide variety of Chinese goods that arrive at an American port. If the renminbi has fallen 10 percent, the tariff is basically nullified.

Some politicians in the United States and elsewhere have long said that China manipulates its currency, even though Washington officials — including in the Trump administration — have stopped short of official accusations. But in this case, many of the forces weakening the currency are beyond Beijing’s immediate control.

China’s financial system is firmly controlled by the government, giving the country’s leaders a great degree of control over how much the renminbi is worth. Officials set a daily benchmark rate for the renminbi and allow its value to move a smidgen above or below that level in currency markets. Chinese officials say each day’s trading activity helps determine the value they set for the renminbi the next day, but they disclose few details about how that works.

On Tuesday, Beijing set that guidepost at 6.9574, just a hair’s breadth stronger than 7. In the world of foreign exchange, a higher number means a weaker currency.

Right now, traders are sending Beijing a single message: The renminbi should be worth less. The people and companies that hold the currency have become increasingly nervous about China’s slowing economic growth, slumping stock market, fragile real estate market and seemingly intractable trade war with the United States. Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive.

There are other reasons. Since late July, Beijing has tried to prop up the economy by having the state-controlled banking sector increase lending, making money more available. That 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 makes it attractive for many people to sell their renminbi and buy dollars. Would you rather have a one-year renminbi certificate of deposit that pays 1.5 percent interest now, or a one-year dollar C.D. that pays out 2.6 percent or more?

Article source: https://www.nytimes.com/2018/10/30/business/china-renminbi-currency-trade-war.html?partner=rss&emc=rss

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