China's decision to let its currency depreciate against the dollar on Monday has brought the trade dispute into a new phase that could lead to an economic war. But the monetary weapon is double-edged for Beijing.
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<p>This is the summer figure. For the first time since May 2008, China let its currency depreciate below the threshold of 7 yuan to the dollar on Monday, August 5th. The US administration reacted violently to this decision by officially accusing Beijing of "manipulating its motto". Again, this is a first since the early 1990s.
But we are no longer there and the financial markets are not mistaken. Stock markets around the world plunged on Monday in reaction to this new phase of the Sino-US trade dispute.
Change of register
But is it still a purely commercial confrontation? On the one hand, "this is a reply to the US announcement last Thursday, new trade sanctions.They surprised and particularly irritated the Chinese authorities because they were decided in the middle of negotiations between the two country, "notes Mary-Françoise Renard, head of the Institute for Research on the Chinese Economy (Idrec) at Clermont-Auvergne University, contacted by France 24.
This depreciation of the Chinese currency is also part of the logic of the tariff escalation, since it serves to mitigate somewhat the weight of US taxes. The decline of the yuan against the US dollar makes it possible for Chinese companies to lower the price in dollars of their exported products, which is to say that they become more interesting for a US importer, despite customs duties.
However, this is the first time that Beijing leaves the field of purely commercial sanctions. Until now, China has always replicated an eye-to-eye, tariffs for tariffs, while this time, "she opted to hit the exchange rate," displacing the confrontation on the monetary field, notes Mary- Françoise Renard.
A change of register "important symbolically", recognizes the French expert. It seems to indicate that the Chinese authorities will not shrink from the prospect of turning a trade conflict into a total economic war. This is what worries many observers: "On a scale of 1 to 10, this new Chinese response to US sanctions deserves an eleven!", Said Paul Krueger, an analyst at the US consulting firm Kowen Washington Research Group, in a note on the latest developments in Sino-US tensions.
Collateral damages
The currency exchange weapon, even if it is used to punish the United States, is also more blind than customs duties. The latter specifically target products imported from the United States, while the depreciation of the renminbi causes significant collateral damage by offering a competitive advantage to Chinese exporters in all markets and against all their competitors, whether American, European or others.
In addition, "other Asian countries have their currency linked to that of China, which means they will also experience a depreciation of their currency, favoring their exporters," says Mary-Françoise Renard.
But observers are especially worried about the reaction of US President Donald Trump. The latter has not, indeed, not to act also in the field of exchange rate. While early July, Larry Kudlow, one of his major economic advisers, had assured that "the United States would do nothing to weaken their currency," Donald Trump had quickly rectified by assuring that he "had not never said he would not do something "if China acted to favor its exporters.
The prospect of a currency war has awakened memories of the Great Depression of 1929. "That's exactly what happened then: in the 1930s, everyone started erecting customs barriers and decided to to devalue its currency to try to be more competitive than others, resulting in an almost total cessation of world trade, "said Charles Kyle, an economist at Cornell University, interviewed by the Washington Post.
Double-edged weapon
A disaster scenario far from inevitable. Mary-Françoise Renard wants to believe that the extent of the depreciation of the yuan "will be limited" because it is a double-edged sword for Beijing. "The main danger lies in the risk of capital flight," notes the director of Idrec. In the face of a depreciation of the yuan, investors will be tempted to move their assets to countries where the currency is stronger.
That's what happened in 2015, when Beijing decided to brutally devalue its currency to try to boost its exports. The consequence was a sharp fall in the stock market, foreign investors eager to get their money out of the country and some of the wealthiest Chinese who had put their money abroad. The experiment left a very bitter after-taste to the Chinese leaders, forced to take action at the end of 2015 to limit the possibility for the Chinese to bring their money out of the country.
But by preventing wealthy Chinese from shielding their money from fluctuations in the yuan, policymakers also risk paying a political price in the event of a prolonged depreciation of the national currency. These great fortunes, which often have political influence, would certainly not look favorably at the value of their assets diminish because of yet another chapter of the Sino-American conflict.
Another danger often invoked concerns the effect of the depreciation of the yuan on the purchasing power of the Chinese. Indeed, when exporters profit, consumers often drink, because the prices of imported products, they increase. But, in China, it is especially a problem for the "upper middle class, which is the only one to be able to afford the consumer goods of import", nuance Mary-Françoise Renard.
Although China has no interest in abusing the exchange rate weapon, its decision to use it comes at a very inconvenient time. The resumption of negotiations between the United States and China in May had given rise to hope for an agreement before the end of the summer. The latter has vanished, carried away by the stubbornness of the two superpowers not to let the other the last word and the last salvo of sanctions.
