Does the world enter a currency war led by China to counter Trump’s fees? | economy

On April 4, the Chinese People’s Bank reduced the reference price of the yuan to its lowest level since last December, in light of the escalation of the trade war with the United States, and this has sparked speculation in financial markets about the possibility of Beijing resorting to a sharp reduction in the value of its currency, in a possible transformation from its previous policy that focused on the stability of the yuan.

China announced on Wednesday that it would increase its reprisal customs duties on American products to 84%, instead of 34% as it was scheduled, in a new escalation of the trade war between Beijing and Washington.

The new customs duties imposed by US President Donald Trump entered into force on dozens of commercial partners yesterday, Wednesday, and reached 104% on imports of Chinese products, before Trump decided to raise it to 125% and apply immediately.

The Chinese Ministry of Commerce later said in a statement that the “additional customs duties” will be raised from 34% to 84% “as of Thursday.

China has warned China that it would firmly respond to Trump’s fees and threats.

In an indication of this trend, the Chinese People’s Bank has set the reference yuan exchange rate at 7.1889 yuans against the US dollar, which is the lowest level since January 17.

Amid the trade tension between America and China, the yuan declined locally to 7.3518 for the dollar in early trading, which is its lowest level since December 26, 2007. The yuan lost about 1.2% this month.

China weapon is the strongest

But what if China, as many economic analysts around the world expect to reduce the value of the yuan as a retaliatory step in response to Trump’s customs duties?

The US Bank of Wales Vargo believes that there are real risks from China’s resort to a deliberate reduction of its currency value of up to 15% within two months.

For its part, the Jeffrez Financial Group expects that Beijing to “a large reduction” in the value of the yuan may reach 30%, if it decides to use the currency as a direct weapon in the commercial conflict, according to Bloomberg.

History

On August 11, 2015, the Chinese Central Bank suddenly reduced the yuan value and unexpected by 3%, and it was the largest decrease in two decades at the time, and this step had deep effects on the global economy according to the Investobide platform, most notably:

• Financial market fluctuations: Global stock markets, especially in the United States, Europe, Asia and Latin America, decreased, and emerging market currencies decreased in response to the Chinese step.
• Goods and oil prices: Brent crude decreased by more than 20%, driven by fears of poor Chinese demand. It reported the decline in prices for oil importing countries (such as India), but it has damaged the exporters of commodities with the low prices of Chinese products and goods.
• Great pressure on emerging markets: Countries such as India, Vietnam and Indonesia have faced great trade pressure, as cheap Chinese goods have reduced their exports. The value of the Indian rupee decreased to its lowest level in two years, and the bond markets witnessed severe fluctuations.
• Currency war concerns: Reducing the value of the Indian rupee raised fears of a currency war, as the United States accused China of currency manipulation, then officially ranked it as a currency manipulation in 2019 (this classification was later canceled in 2020).
• Commercial and political tensions: The United States considered this step an unfair commercial advantage, and this has exacerbated trade tensions between the United States and China to the current scene.

As we saw, China’s reduction in its currency at that time was only 3% significant impacts on the global economy, so what if China reduced its currency by 15% to 30% as experts expect?

Currency

The way Beijing will respond to the customs duties imposed by the Trump administration on Chinese exports to the United States will be decisive, not only for China, but also for its commercial partners in Asia, and global markets on a wider scale, according to Reuters.

“The use of the yuan to respond to Trump will be” the strongest weapon “of China, which is” a tremendous impact on global markets “, according to Bloomberg.

Brooks warned that a significant reduction in the yuan may launch a global decline that strikes emerging markets strongly, and if it continues, it may lead to the collapse of the American economy itself.

Goldman Sachs analysts believe that China continues to resist any sharp decline in the value of its currency, but at the same time they point out that the cumulative impact of all American customs duties imposed since Trump took office in January may reduce the annual growth rate of China by 1.7%, which is a huge economic blow that may be difficult for Beijing to tolerate, according to Reuters.

The fees of 104% would cause extreme financial damage to Beijing, and may hinder their efforts in addressing the continuous real estate crisis, promoting local consumption, developing its military power, and financing its giant investment projects, according to Reuters.

https://www.youtube.com/watch?v=qyonvsoripa

Unlike the first trade war during the Trump era, China cannot rely on the export of goods or the transfer of investments to other Asian countries to mitigate the fees, as these countries were also imposed high tariffs, and were even higher than those imposed on China in some cases such as Vietnam.

In this context, reducing the value of the currency may be the most powerful weapon in Beijing’s hand to respond to the latest threats of Washington, as reducing the value of the yuan will represent a tremendous challenge to the global economy, especially since China is the largest source in the world and the second largest economy, and any change provided by an economy of this size will have wide and profound repercussions.

With the decrease in the prices of Chinese goods that may drown the markets more than they are now, many emerging economies – especially those dependent on export – will face a decrease in their commercial revenues.

And if these countries are burdened with debt and are largely dependent on exports, their economies will be severely damaged; For example, Vietnam, Bangladesh and Indonesia are largely dependent on its exports of shoes and textiles, and these countries may face great difficulties if Chinese goods become cheaper and broader in the global market according to the Investubia platform.

It is possible that the decline in the yuan will push Asian and other global countries to allow its decrease in its currencies to maintain its competitiveness, which may ignite the spark of a global currency war war that will have catastrophic effects on the international economy, according to Reuters.

Although Beijing has previously asserted that she does not intend to resort to reducing the value of its currency and preferring to maintain the stability of the yuan, but this was before the “liberation day”, according to Trump’s expression.

If attempts to negotiate with Washington fail, Beijing may not find it necessary to use a foreign currency weapon to compensate for the upcoming economic shock.

Finally, in light of the escalation of commercial tensions and the return of economic protectionism policies, the possibilities of the outbreak of a global currency war appear more realistic than ever, and Beijing will determine the path of the global economy in the coming months, either to take the path of negotiation, or to choose to use its monetary tools to defend its interests, and in both cases, the whole world will have a difficult test for its ability to avoid a new economic crisis in which no one will win.