The curious case of a dipping Yuan

In recent times, China’s currency, Yuan, has fallen to a point lowest in over a decade’s time,prompting the United States of America to label Beijing as a “currency manipulator”.

It all started with the escalation of the infamous US-China trade war, sparked by imposition of fresh US tariffs. The People’s Bank of China (PBOC)attributed the slump to have been driven by “unilateralism and trade protectionism measures and the imposition of tariff increases on China”.

Reasons

China practiced devaluation of currency which led to the fall in value of Yuan as it is not freely traded and the government limits its movement against the US Dollar. Additionally, unlike other central banks the PBOC is not independent and faces claims of interference when big moves occur in its value.

Impact

From the US perspective, it is seen as an attempt to offset the impact of higher tariffs on Chinese goods imported into America. While it appears as a win for consumers around the world who can now buy Chinese products at a cheaper rate, it may not be the case everywhere. There are other risks associated with it, such as that of a weaker Yuan which will make imports into China more expensive , potentially driving up inflation and adding strains on the already slowing economy. This will also encourage currency holders to invest in other assets.

In a nutshell, currency manipulation by China or any other country is seen as flouting global trading rules by conferring unfair competitive advantages. Hence, it is an effective way to weaponize exchange rate, even if not proactive in weakening the currency by direct intervention.