Sunday, May 31, 2020

Falling Chinese Currency amid rising US-China tensions, Hong Kong crisis and COVID

People's Bank of China HQ- Beijing; Photo Courtesy: Max12Max, Wikipedia

When the dragon starts dancing wildly, it is going to make others nervous and markets volatile. Currently, when the world economy is crashing due to COVID related lockdowns and production losses, China is adding more fuel to fire by voting a plan to introduce new security laws to Hong Kong - former Crown colony of the British Empire. Hong Kong Crisis and rising tensions with US is causing yuan to fall farther - lowest level against USD in eight months [1].  Chinese central bank was intervened for the 9th consecutive trading day [1] in the market to release the downward pressure on yuan.

Just after US Secretary of State's declaration to the US Congress that, they do not consider Hong Kong suitably autonomous from mainland Chinese rule; National People's Congress voted in favor of introducing new laws. Whether the city is autonomous or not is an important factor in deciding whether Hong Kong will continue to get preferential economic and trade treatment from the US. Losing this status will force a lot of companies operating there to reevaluate their strategy; this can even threaten Hong Kong's future as Asia's financial hub.

The ironic fact is, depreciation in yuan hurts the US, European and other nations which imports Chinese products much more than it affects China. However, it is very risky for the Chinese to let the currency slip as other countries will declare China a currency manipulator and add penal tariffs on imports from China.

The question is will China's central bank defends yuan’s fall and stabilize it; if yes, then how long?


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