During June, the Renminbi declined by 3.3 percent against the U.S. Dollar, resulting in the largest single month decline for the Renminbi since the People’s Republic established their foreign exchange market in 1994. Last week the Renminbi declined by an additional 1.9 percent.
How will this impact U.S. trade with China? Is our trade dispute turning into a currency war?
Multiple “trade experts” are currently speculating that China is weaponizing the Renminbi – that is, devaluating it to offset the impact of U.S. tariffs, as a weak currency will make Chinese exports more competitive and neutralize some of the bite from U.S. tariffs. However, Bo Zhuang, chief China economist at TS Lombard, the globally renowned research firm, disagrees with assertion that China is weaponizing the Renminbi to support exports. Zhuang explains that “any benefits from a major Renminbi devaluation will be far outweighed by the negative consequences of: accelerated capital, flight, domestic liquidity tightening and increased credit stress.”
All in all, it remains an open question as to whether the weakening of the Renminbi is a conscious policy decision being made by a Chinese government which semi-manages its currency, or rather, just simply the result of investors acting independently on their fear that U.S. tariffs will weaken China’s economy. While we do not know how this struggle will unfold, it is clear we are watching the beginning of a very dangerous game.