The Chinese Yuan, also known as the Renminbi, or RMB for short, is pegged to the US dollar but allowed for minor fluctuations
SUMMARY
On August 6, the Chinese currency, Yuan, and mainland equities declined. While the yuan fell 0.17 percent to 6.8402 Yuan per dollar, the Shanghai Composite Index closed down 1.3 percent at its lowest since February 2016. Hong Kong stock markets also fell along with the mainland market. Although Hong Kong had solid economic and fiscal policy fundamentals, the local market still under performed. In terms of local governance and trade, Hong Kong is considered a separate entity. It was not the target of the new US tariff which came into effect on July 6. However, many Hong Kong-owned companies have manufacturing operations in China and financial links with the mainland. Mainland’s stock market has fallen in the past 8 weeks. It brought the Yuan to Dollar ratio down to 7:1. A few days earlier, on Friday August 3, the People’s Bank of China said it was imposing a reserve requirement of 20 percent on trading of some foreign-exchange in order to stabilize the Yuan. This approach was used for the yuan devaluation in 2015. Nevertheless, the trade tension between China and the United States does not show any signs of easing. On August 1, US President Donald Trump considered raising proposed tariffs from 10% to 25% on $200 billion Chinese goods, from planes to consumer products. On August 3, Beijing vowed to fight back the tariff from the US with 5-20% tariffs on $60 billion U.S. goods, mainly on soybeans, meat, and natural gas.
FAO GLOBAL ASSESSMENT
Many analysts are saying China is feeling the pain of the American tariffs and the Hong Kong stock market cannot escape from the spillover. The fall of stock market and yuan devaluation may be an indicator supporting these assessments. However, it is still a good time for American companies to import Chinese goods due to the low exchange rate. Although the US posted tariffs on multiple Chinese goods, some products may have enough margin to absorb a price difference because they may still be lower than American-made products. For US companies heavily reliant on Chinese labor, Southeast Asia could be an alternative choice for relocating factories, temporary or permanent. For example, Sony manufactures its cameras in a factory in Chonburi, Thailand. Other companies like Sony (or smaller) can offshore their production in Thailand or other countries in Southeast Asia due to the abundance of similarly skilled labor, a more established business environment, and the non-exposure to the string of tariffs laid upon Chinese goods. Moreover, if China reduces its exports of steel to the US, Southeast Asia may be the next alternative market to support a string of infrastructure projects planned with Chinese support. The pain that China’s market is feeling right now may push Chinese and US businesses to explore other markets with lower or no tariffs.
Related Links
- Bloomberg: China’s Yuan, Shares Fall as Trade Row Overshadows Policy Shift
- CNBC: Big IPOs can’t save Hong Kong from trade war’s ‘very long shadow’
- CNN Money: Trade war slams stock markets again
- Reuters: Trade tensions boost dollar as Chinese stocks drop
- Forbes: China’s Japanese Lesson For Fighting Trump’s Trade War
Analyst Bio
Ziqing Zhang- International Policy Associate
Ziqing “Sunny” Zhang is an international policy intern and a Masters student in the Elliott School of International Affairs at George Washington where she is majoring in Asian Studies with a concentration in international development and focusing on East Asia and development in Southeast Asia. A native Chinese speaker, Ziqing is fluent in both Mandarin and Cantonese as well as English. She has previously interned at the U.S.-China Education Trust, the Japan-American Society of Washington, DC, and is an alum of American University in Washington, DC.
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