The Trump administration has recently imposed new tariffs on Chinese goods, which has resulted in the People’s Bank of China allowing the yuan to fall below its significant reference level of 7 per dollar. This move has stunned the world markets, as the yuan has been growing steadily in the past few years.
Here are the main dangers of China allowing its currency to slip:
Competitive Edge
A weaker yuan will impact the competitiveness of American businesses, as it will make Chinese goods cheaper in the American market to offset Trump’s new 10% trade tariffs. This means that American products will also be more expensive in China, discouraging their domestic consumers. Therefore, American companies will find it difficult to compete with their Chinese counterparts. However, China will also suffer as foreign companies will find selling their products more expensive in China, leading to capital flight. In fact, the last time China devalued its currency in 2015, it lost over 600 billion in capital flight. This incident highlights the risks of a weakened yuan to the Chinese economy.
Global Markets
The fall in yuan has led to volatility in the global financial markets, as China is a major global economic player. This situation is evident by declines in share prices of major companies in most sectors in the US and leading European stock markets. For example, major global tech companies such as Apple, Amazon, Microsoft, and Facebook have recorded significant drops in value. Another potential danger is countries affected by the yuan fall also devaluing their currency.