Yuan-to-Dollar Rate Breaks Key Benchmark, Escalating Trade War

August 5, 2019 Updated: August 5, 2019

The Chinese yuan has breached a key seven-per-U.S. dollar exchange rate on Aug. 5, for the first time in 11 years.

The seven-per-dollar benchmark is significant because the Chinese regime has said that rate would be the bottom threshold that ensures that foreign investors wouldn’t move out of China. A higher exchange rate would allow Beijing to offset the effects of U.S. tariffs.

On Aug. 5, the yuan dropped nearly 2 percent in one day to reach 7.053 per dollar, days after U.S. President Donald Trump announced that he would impose 10 percent tariffs on an additional $300 billion worth of Chinese imports.

Reactions

Trump reacted to the news on Twitter: “China dropped the price of their currency to an almost historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

Later on Aug. 5, the U.S. government determined that China is manipulating its currency, and thus the United States will engage with the International Monetary Fund to eliminate unfair competition from Beijing, U.S. Treasury Secretary Steven Mnuchin said in a statement.

The last time the yuan dropped to this rate was on Aug. 14, 2008, when it hit 7.0. Since then, the rate has fluctuated, hovering between 6.2 to 6.9 per dollar.

On Aug. 5, Chinese state-run media Xinhua quoted Yi Gang, the governor of China’s central bank, as saying that the exchange rate had naturally devalued due to market forces.

He addressed the accusations of currency manipulation, saying, “The [Chinese regime] does not engage in competitive devaluation of the currency, doesn’t use the exchange rate for competitive purposes, and would not use the exchange rate as a tool to deal with external disturbances such as trade disputes.”

Frank Tian Xie, professor of business at the University of South Carolina–Aiken, concluded that Beijing likely determined the exchange rate, “but, on the other hand, the market pressure is affecting it as well,” he told The Epoch Times on Aug. 5.

The devalued currency brings two direct effects to the Chinese economy, he explained. On one hand, it can bring positive impacts, as a cheaper currency can make all Chinese products cheaper in the global market, while offsetting the costs of paying tariffs on goods exported to the United States.

The other consequence would be negative, because foreign investors and wealthy Chinese elites will likely transfer their capital out of China in order to maintain the value of their assets.

As the Chinese economy is in the midst of an overall severe downturn, Xie said Beijing may have chosen to devalue its currency because it has “no better solution” to its woes.

The Chinese regime has previously used stimulus policies to keep its economy from slowing down. But that has proven problematic. “They simply printed too much money [to maintain the economy’s growth rate] over the years, creating a huge inflation that caused the value of the yuan to go down the drain,” Xie said.

He also predicted that Beijing would want to use the cheaper yuan to create a trade surplus with the United States, but “as a result, the Trump administration may punish China by increasing tariffs on the $300 billion Chinese goods from 10 to 25 percent very soon,” Xie said.

Xie surmised that the high inflation coupled with capital outflow will further weaken the yuan, and promote a vicious cycle of more capital outflow. “The shift of the [manufacturing] supply chain from China to Southeast Asia would accelerate at a larger scale,” he added. Many foreign manufacturers have moved production out of China in recent months in order to avoid paying tariffs on goods destined for the U.S. market.

“The Chinese economy will be weakened further and unemployment will shoot up even more. This could threaten the political stability of the Chinese regime,” he said.

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