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China Sets Yuan’s Midpoint At Its Weakest Since April 2008; Why Are Investors Concerned?

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China's central bank- The People's Bank of China, set the official reference rate for Chinese currency at 7.0039 yuan per dollar on Thursday, the lowest level since April 2008. The central bank allows the currency to be traded within a narrow band of 2 percent from each day's midpoint. It was set at a stronger level of 6.9996 level on Wednesday.

China Sets Yuan’s Midpoint At Its Weakest Since April 2008
 

Investors concerns have now shifted from the economic slowdown from tariffs imposed by the US on China to yuan's devaluation. It started on Monday when the Chinese currency breached the politically sensitive level of 7 per dollar for the first time since 2008 financial crisis, which the Trump administration said was a tactic used by Chinese authorities to make their exports attractive despite the tariffs.

While it is not the first time that the US has made such an accusation, things intensified when the US Treasury officially declared China a "currency manipulator."

China's has denied Washington's allegations.

Why are the investors worried?

Apart from the obvious escalation in US-China trade spat, devaluation and volatility in yuan will affect every company that has a strong customer base in China or has its supply-chain extensively based in the country.

It will also affect emerging economies, including India, that compete with China in export markets as it will make Chinese products more attractive. Those companies making exports to the country will also see a drop in their profit margins.

Vietnam and Singapore, whose markets receive a large number of Chinese tourists every year will see a decline in their sales as travel becomes costlier.

Global equity markets have been bleeding since last week when US President Donald Trump announced his decision to impose 10 percent additional tariffs on Chinese goods worth $300 billion.

China has always had a significant impact on the global economy and emerging markets. Further, since currencies are interconnected, markets fear the possibility of a currency war.

 

Moreover, the dollar has been the world's reserve currency and a safe haven asset for investors in times of uncertainty. There is a possibility of the dollar value increasing as demand increases, which will in turn every other currency as they are weighed against the greenback. Further, dollar's strength will displease Trump and one cannot ascertain what he would do next.

Read more about: china yuan us rupee
Story first published: Thursday, August 8, 2019, 10:43 [IST]
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