China devalues yuan as countermeasure against US tariffs

Those speculators who decided to invest in the Chinese yuan have incurred heavy losses. Following record lows in late August, the renminbi has been on a losing streak. On September 1, the US imposed fresh tariffs on popular imports from China. The sharp escalation of the trade war prompted Beijing to retaliate. However, China’s authorities have limited scope of punitive measures. One of such powerful time-tested tools is the devaluation of the national currency. Trying to win the competitive advantage among other exporters, the People’s Bank of China decided to weaken the renminbi. Last month, the yuan tumbled by over 4% against the greenback with the worst slump since January 1994 when China’s central bank adopted the modern policy of fine-tuning the yuan’s exchange rate. Besides, in August the yuan passed the psychological level above 7 versus the US dollar for the first time since the global financial crisis. Indeed, China resorts to devaluation to survive turbulent times. This time, the White House slapped a 10% tariff on the Chinese imports worth $300 billion, thus hitting all of them with levies.

Nevertheless, the US and China’s top officials confirmed that the trade talks would resume in late October in Washington. If market participants do not find out evidence of progress in the trade relations between the US and China, clouds will darken over China’s economy and global financial markets. The People’s Bank of China could push the yuan to the level as weak as 7.5 against the US dollar by the year end. This move will make China’s goods more attractive to overseas buyers at the peak of the trade war. Nevertheless, the yuan’s persistent weakness could have side effects. One of them is a capital flight out of China that will cause financial troubles to the domestic economy.