Weaponising Yuan: Beijing's double-edged sword

China's move to devalue its currency could prove to be a double-edged sword in its escalating trade war with the United States. 

(Text: AFP)

'Currency manipulator'

Although China's central bank governor Yi Gang insisted Monday that the country would "not engage in competitive devaluation", Washington wasted no time in formally labelling Beijing a currency manipulator when the yuan plunged below the key 7.0 per dollar threshold.

US President Donald Trump has long accused Beijing of manipulating the currency as a weaker yuan makes Chinese exports - which lie at the heart of the trade war - cheaper.


Yuan or Renminbi

The Chinese yuan, also known as the Renminbi, is not freely convertible and Beijing limits its movement against the dollar to a two per cent range on either side of a central parity rate, which is set each day.


'Severe and destabilising'

The two sides characterised last week's resurrected trade talks in Shanghai as constructive, but tensions have mounted rapidly since then, as Trump vowed to impose fresh tariffs on $300 billion in Chinese goods from September 1.

This would subject virtually all of the $660 billion in annual merchandise trade between the world's two top economies to punitive duties.


Risk to China

Depreciation also poses risks to China - a fact that has not escaped Beijing's policymakers.

Other analysts agree that Beijing's dislike of instability - and fears of a large capital outflow - will prevent the central bank from allowing too much dramatic movement.


Blaming Trump

However, the trade war could also serve Beijing's broader ideological needs. 

China's economy is already slowing - growth slipped to its weakest pace in almost three decades in the second quarter - and the trade spat throws up an easy scapegoat if the situation fails to improve.


Pressure on US

Currency movements are only one of the tools which Beijing says it could use to increase pressure on the US, including potentially even a sell-off of its $1.1 trillion pile of US Treasuries.

Beijing has already been trimming its Treasuries holdings, which are the smallest they have been in two years, and deepening tensions mean they could shrink further.