Much attention, of late, has focused on the trade war between the United States and the European nations. The US has raised tariffs on imported goods to protect its farmers. The European nations have retaliated by raising tariffs on the US manufactured goods. Much attention has also been put on the trade war between the United States and China. A look at the exchange rate data over the past one year reveals that in July 2017, the exchange rate stood at USD 1 = CNY 6.75. The exchange rate in April 2018 was USD 1 = CNY 6.28; thus, the Chinese yuan appreciated sharply against the US dollar. Since April 2018, the currency steadily declined against the dollar.
A weak Chinese yuan has important economic implications for the Chinese economy. First, a weak currency makes the Chinese exports more competitive. That is because the Chinese exports become relatively cheaper in the international market. An increase in Chinese exports, due to a weak yuan, may be able to offset the negative effects of high US tariffs on Chinese exports. Second, an increase in Chinese exports is expected to lead to a higher economic growth in China. High economic growth, in turn, is expected to attract more foreign investment and also increase employment in the manufacturing and services sectors; consequently, the real estate prices in China will probably increase. Increase in house prices will call for government housing subsidy. With an increase in tax revenues from a high economic growth rate, the government should be able to provide affordable housing to the low-income and the marginalised groups. Therefore, if the trade war between the United States and China persists, then a weak yuan may allow China to offset the negative effects of high US tariffs. On the face of a trade war between the two economic superpowers, a weak yuan may be a blessing in disguise for the Chinese economy.
- The reader is a professor of economics.