Published: Mon, August 12, 2019
Economy | By

IMF Warns Increasing US Tariffs Could Cut China Growth Sharply

IMF Warns Increasing US Tariffs Could Cut China Growth Sharply

The IMF's views on the RMB are at odds with those of its largest shareholder, the United States, which declared China a "currency manipulator" after it allowed the RMB to slip below 7-per-dollar to 11-year lows. Mid-point fixings in the last few days have been successively lower but not as weak as traders expected, while source said state banks have been active in forward markets.

China burned through $1 trillion of reserves supporting the yuan in the last economic downturn in 2015, which also saw it devalue the currency in a surprise move.

While markets haven't reacted too strongly to the weakening yuan this week, it is possible that "the yuan could weaken further on unexpected shocks in the future", Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun. Although the diversification of currency composition may be conducive to asset preservation and risk avoidance from the perspective of investment and trade, we believe the "de-dollarization" of foreign exchange reserves may only cause greater risks in the context of intensified trade frictions and global currency turmoil.

The International Monetary Fund said in its annual report on the Chinese economy released Friday in Washington that if the USA escalates its current threat to add 10% extra tariffs on the remainder of its imports from China to 25%, growth would be trimmed by 0.8 percentage point, leading to "significant negative spillovers globally".

The structure of China's foreign trade will continue to improve with more flexibility in the second half of this year due to its institutional, industrial and market advantages, officials and experts said on Thursday.

A second Shanghai-based trader said trade talks that were scheduled for September in Washington, prior to the latest USA tariff threat, now seem unlikely, adding further pressure on the Chinese currency. It was a fitting end to a wild week where markets zoomed down, up and down again as investors recalibrated by the minute how much the tensions will hurt the global economy. "The PBOC is unlikely to fuel excessive speculative RMB depreciation pressures after allowing USD/CNY to trade above 7", analysts at Bank of America Merrill Lynch said in a note.

Stocks stumbled Friday as worries flared yet again that President Trump's trade war with China may be worsening. Above all, with domestic monetary policy unchanged, the yuan's dip to 7.1 to the dollar could, if sustained, essentially absorb the impact of Trump's latest tariff increase, according to China Merchants Bank Co.

The yield gap between Chinese and US benchmark 10-year government bonds stood at 134 basis points on Friday afternoon, compared with a low of 28 basis points hit in November.

China's daily fixing is a closely watched event.

As of 0830, the offshore yuan was trading at 7.0795 per dollar, nearly flat on the day.

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