Fresh 11-Year Low Reached By Chinese Currency Yuan, Could Lead To Capital Outflow

Worries that China has completely given up on the chance of arriving at a trade deal with the United States and end the trade war between the two largest economies of the world were stoked after the value of the Chinese yuan dropped to a new 11-year low against the US dollar at the end of last week. The fears were founded by concepts that the Chinese government was not interested in controlling the devaluation of the yuan against the dollar because they it wanted to offset the impact of the tariffs on exports imposed by the US on Chinese goods imported into the country.

The drop in the yuan also affected the value s of a number of regional currencies, also driven down by interest rate cuts by central banks. The situation can lead to a hastening of the outflow of foreign capital from Asia by this year.

According to reports, analysts believe that Chinese authorities have been giving signs in recent times that its economy is being prepared for a situation where there is no development made in the negotiations for a trade deal with the United States which is expected to be happening next month in Washington between trade representatives of the two countries.

And despite China being officially labeled as a currency manipulator by the US earlier this month after China allegedly allowed the yuan to fall below the traditional value of US$7 for a yuan, Chinese authorities again allowed the currency to fall below the levels last seen in March 2018 in what was the seventh straight day of devaluation.

Earlier this week, the People’s Bank of China (PBOC) reduced interest rate which was followed by the drop in the yuan. The new rate of interest set by the PBOC was set at 4.25 per cent from the previous lending benchmark rate of 4.35 per cent. According to some analysts, this is also the beginning of a new cycle of rate easing by the PBOC to stimulate economic growth in the Chinese economy.

“Perhaps the PBOC is sending a message to the US trade hawks that it will let the yuan gradually weaken as a policy weapon to neutralise the effect of increased tariffs,” said Stephen Innes, co-founder of Valour Markets.

The Economist Intelligence Unit warned that US-China bilateral relations would be brought to a new low after September 1 when the latest round of fresh tariffs announced by US president Donald Trump earlier is set to take effect on a wide range of Chinese products which are primarily consumer goods worth US$130 billion. The Economist Intelligence Unit hence warned that preparations for e prolonged conflict should be made by businesses and should be ready to accept other manifestations of the trade war.

Analysts also warned of a significant speeding up of capital outflows from Asia – which is already being witnessed, because of the weaker yuan and the potential for similar fate for other Asian currencies.

(Adapted from SCMP.com)

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