In a move that might indicate a temporary win for the Trump government in their trade war with China, Beijing has introduced a new currency policy that surprisingly does not include any anti-U.S. measures. This has led many political experts to believe that China might be signaling a willingness to cooperate with the U.S. to end the trade war thanks to growing worries about an economic slowdown.
New currency policy
The People’s Bank of China (PBOC) recently announced that they are introducing a new system of calculation for the Yuan, called the “counter-cyclical factor,” in a bid to keep the currency’s value stable against the dollar.
“At the time that this article went into press, most of the quoting banks have adjusted the counter-cyclical co-efficient. We expect that the counter-cyclical factor will play a positive role in keeping the RMB exchange rate basically stable at an adaptive and equilibrium level,” PBOC said in an official statement.
The new system has reportedly been put in place by the Chinese government in order to avoid any larger weakening of the Yuan against the U.S. dollar. Such a weakening would actually help China by making its exports cheaper, thereby negating any increased tariffs by the U.S. for Chinese imports.
However, allowing the Yuan to weaken considerably risks inviting the wrath of the American government, which has time and again been very apprehensive about China weaponizing their currency in its trade war with the U.S. And making the United States government angry is the last thing Beijing would want right now.
Afraid of U.S. retaliation
Earlier in August, U.S. Senator Lindsey Graham commented that China might weaken the Yuan in a bid to counter the effect of U.S. tariffs. He wanted the government to take additional measures to punish China for such manipulative behavior.
“I am going to talk with the president about reintroducing my legislation that would declare China a currency manipulator, allowing tariffs to be put on products that come out of China that benefit from currency manipulation. We’re in the initial discussions, but I’m afraid we’re going to have to go down this road,” he is quoted by South China Morning Post.
If Graham’s suggestions were followed by the U.S. government, then Chinese imports would face a series of additional restrictions. This would stress out the already sour trade relationship between the two countries.
Beijing has apparently decided that this would be an undesirable situation and has gone ahead with keeping the Yuan stable against the value of the U.S. dollar, indicating that President Trump’s harsh policies against China are starting to benefit the U.S.
Chinese economic concerns
The weakening of China’s economy has also played a big role in the government’s decision not to antagonize the U.S. any further. While the immediate economic impact of the trade war is minimal, what is problematic for Beijing is the fact that the slowdown is starting to affect its efforts to rescue the economy from excessive dependence on debt. In fact, the Chinese government has been forced to advise banks to increase lending because of the slowdown.
Official statistics released by Beijing show that industrial production, retail sales, and business investment have weakened over the past months. In such a situation, it is not surprising that China is looking for a compromise with the U.S.