Newsletter
Yuan moves against the dollar amid US-China trade turmoil

China – US: A New Low With Potential High Costs

by -

Another new low hit the crisis between the United States and China. After new sanctions issued by Donald Trump this summer, the Empire of the Rising Sun has decided to retaliate.

Beijing announced that it would depreciate the yuan, the Chinese currency. As of now a dollar is trading for 7 yuan – the lowest it has been since the financial crisis of 2008, which could well lead to an economic slowdown in Europe – but also in the United States. 

Since the announcement of the yuan dropping, the world’s main stock markets have sharply dropped by nearly 2% both in the United States and on the European continent. What does it mean for the world’s economy? Is the recession inevitable? Here is an analysis of what to expect. 

Beijing retaliation against Washington

A week ago, the president of the United States announced that the customs tax on Chinese products would increase by 10% on more than $300 billion worth of merchandise.

Since March 2018, Washington has been issuing trade sanctions against products made in China, hoping to revive the manufacturing American ecosystem.

While the results have been good for the US economy – unemployment has never been that low since the 2008 financial crisis to 3.7% this year – analysts worry this policy might lead to a global recession on the long term.

Read on Alvexo: “Is a Russian-American Collaboration A Diplomatic Solution?”

The seven-yuan itch

The reaction from China was quick. A few hours later Beijing released a statement announcing it would depreciate the national currency, to 7 yuan for a dollar.

As this represents the lowest trade since 2008, the goal of this depreciation was to make Chinese products more competitive on a global scale in manufacturing industry. Thus making sure Chinese products would be cheaper than American products and expand new territories, such as Europe.

On the same day, US president Donald Trump explained on his Twitter account that China was doing what he considered a “currency manipulation”.  According to the American media The Hill, the United States have simultaneously lost nearly 90% of Chinese investment this year, which could abruptly slow down the growth of the country.

Will there be a currency war?

Moreover, economists are predicting a possible “currency war” between the dollar and the yuan. According analysts, by increasing tariffs by 10%, Donald Trump resumed a trade war that was on hold. Only this time, it could seriously affect the US economy.

“The trade war is intensifying and it is possible that a currency war is indeed brewing in. None of this is positive for the global economy,” shared Chris Zaccarelli, from Independent Advisor to Bloomberg.

With the yuan’s deflation, investors have focused their money on “safe havens” such as gold. Last Monday, its value increased by 2% in only one day to reach $ 1,500 an ounce, a record high price since September 2013.

Last but no least, Morgan Stanley analysts have confirmed there could be a recession coming within nine months if talks between Washington and Beijing to de-escalate the situation were to be unsuccessful.

playbook 2019
Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.