The deepening trade war triggered a buzz in money markets across the globe that China may devalue the yuan against the dollar in a departure from their policy of pursuing a stable currency.
President Xi Jinping’s administration — which has warned of a “resolute” response to Donald Trump’s tariffs — has already announced a tit-for-tat 34 per cent tariff on all imports from the US starting April 10 and a slew of import control measures.
If Beijing ends up devaluing the Yuan, it would make Chinese exports cheaper, but at the same time may result in capital flight from a country that had emerged as one of the hottest destinations of foreign capital in the last year or so.
Bloomberg reported that Wells Fargo & Co. saw risks of up to a 15 per cent deliberate depreciation of the managed currency over a two-month period. China could also “go big”, or up to 30 per cent, if they opt to target the currency, according to Jefferies Financial Group Inc, the report added.
Chinese officials have prioritised a stable currency since well before the trade war, but some strategists say the latest tariff blow may spark a rethink, given the worse-than-expected duties risk augmenting deflationary forces already plaguing the economy.
A policy move like devaluation may have a negative impact, warned some analysts, recalling how a similar move in 2015 evolved into a crisis of confidence in China’s ability to control markets.
Meanwhile, there were unconfirmed reports that Chinese policymakers convened in the last three days to discuss the possibilities of accelerating the roll out of the stimulus measures that they had planned even before Trump’s tariffs. Bloomberg reported that the measures will include boosting consumer spending, birth rate and subsidies for some exports. The Chinese top brass is also planning a stabilisation fund to shore up its stock market, added the report.
EU decision
Reuters reported on Monday that the European Union ministers broadly agreed on Monday to prioritise negotiations to remove tariffs imposed by President Donald Trump over retaliation even as it prepared a first set of targeted countermeasures.
The 27-nation bloc faces 25 per cent import tariffs on steel and aluminium and cars and “reciprocal” tariffs of 20 per cent from Wednesday.
With inputs from Reuters