Chinese Yuan drops below 7 in response to additional US tariffs and trade protectionism

In response to additional tariffs announced by US President Donald Trump last week, China devalues its currency, bringing yuan below 7 against a US dollar. The move is said to further complicate US-China trade talks which anyways are going through a rough patch.

This is for the first time in a decade that the yuan fell so sharply. Last, the People’s Bank of China, made yuan cross the bench mark of 7 was during 2008 economic crisis.

Chinese central bank has set its daily reference rate for the yuan at 6.9225, the lowest rate since December. The central bank has set a daily “band” for yuan’s value, in which it can move up or down only by 2%. China’s central bank released a statement on Monday stating that it can keep the yuan “reasonable and balanced”. It justified the move as a response to “trade protectionism and new tariffs on China” by Trump administration.

On August 1, Trump announced on Twitter that US would be levying 10% tariff on all the remaining Chinese goods, which were earlier exempted from any additional duty. It includes goods worth $300 billion such as smartphones, clothes, toys and other consumer products. Now we can safely say that US has imposed tariffs on essentially all of its Chinese imports. The additional tariff would be executed by September 1.

Trump wrote,“Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…”

Many market analyst fear the impact of Chinese move. They warned that any more fiddling with yuan to gain an upper hand in the trade war would be more harm than useful for the economy. It would include capital outflows and fluctuating market.

China fired a lethal shot to numb the impact of increased US tariffs. But the move led to collateral damage, causing slump in the global market, especially Asia. Monday blues were evident all over Asia as Japan’s Nikkei went down by 1.7% and South Korea’s Kospi (KOSPI) fell 2.6%. The Shanghai Composite Index (SHCOMP) dropped 1.6%. In Hong Kong, where pro-democracy protests have rocked the system, the Hang Seng Index (HSI) plummeted 3.1%, the biggest fall since October.

China has an edge over US in currency management as the communist regime allows the country to manage its currency while US government can only regulate the exchange rate. China being the largest exporter of goods to US, gets paid in dollars. Chinese central bank stockpiles dollar to keeping its supply limited. It puts pressure on dollar to stay up, while keeps the yuan down.

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