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08.08.19 9 EDITORIAL BusinessToday is published every Thursday. The newspaper is a MediaToday publication and is distributed to all leading stationers, business and financial institutions and banks. MANAGING EDITOR: SAVIOUR BALZAN COORDINATING EDITOR: PAUL COCKS CONTRIBUTING JOURNALISTS: MASSIMO COSTA | LIAM CARTER BusinessToday, MediaToday, Vjal ir-Rihan, San Gwann SGN9016, Malta Newsroom email: bt@mediatoday.com.mt Advertising: afarrugia@mediatoday.com.mt Telephone: 00356 21 382741 T he devaluation of the Chinese Yuan is widely ac- cepted to be a deliberate decision taken to offset the effect of the punitive tariffs from the United States. Way before he was elected President of the US, Donald Trump was an early critic of the trade relation- ship with China, in part informed by the communist powerhouse's ability to capitalise on cheap labour and its prodigious thirst for US consumer goods. e trading relationship has always been uneven, with US innovation punished not only by the success of Chinese manufacturing's economies of sale, but also by the Chinese economy's penchant for copying of Western goods. Tariffs can help protect home industries and cushion the debilitating effect of trade deficits by controlling the import bill and currency flight. In this case, the US-China trade war goes further. A lot about trade between these two superpowers is also about power and influence. On one hand, the US champions its capitalist system and the freedom that its political system provides as the sandbox of innovation and economic advancement; the Chinese champion a state-controlled system that is hungry for power and leverage at international level, one which involves the use of state-controlled companies (noto- rious for sharing confidential data with the state) and even advocates forcible sharing of trade secrets – a big no-no in the rest of the world. With Chinese exports forming a major share of the US trade deficit, Trump's announcement that he was slapping tariffs on an extra US$300 billion of China's exports, the extent of the slide of China's currency against the US dollar was not expected. is RMB/ USD exchange rate is tightly managed by the People's Bank of China, and is permitted to move only 2% away from a midpoint fixed by the bank each day: so the slide would not have happened had the bank not allowed it, because the bank uses its dollar currency reserves to protect the renminbi. By making China's exports cheaper in US dollars, the immediate effect is to neutralise what the Trump tariffs would have rendered more expensive. But instead, the trade war has now escalated, with the Trump administration accusing China of being a currency manipulator. And that means that in terms of the twist-and-parry of international trade, China is also running out of alternatives to counter American defence of its trade bill. First of all, by making its exports cheaper against the dollar, China is hurting itself by rendering its US imports more expensive. at means consumer goods are now threatening by high inflation, which is already on the rise due to disruptions in supply of food staples such as pigs. In a communist country like China, getting a real handle on the economic data can be a feat, but it also known that there is little that the Chinese central bank can do to restrain inflation. e cheaper Chinese currency becomes, the bigger the risk that money will leave the country at this par- ticular point in time so as to retain its buying power. Capital flight is a big problem for the Chinese, and its hash measures to prevent it harms its own entrepre- neurs and businesspeople who have left the country. Not to mention harming private consumption, some- thing that China has been trying to encourage so as to rebalance the economy away from investment to private consumption. But there also consequences for the rest of the world. If Chinese currency loses value, it will also affect Chinese demand for Western goods – and that is bad news for global economic growth. One could argue that the Trump tariffs are also hurting the rest of the world, indirectly. And then there is the nuclear option: China selling off its more than $1.1 trillion in US Treauries in retal- iation for the Trump tariffs. As a net exporter to the US and the rest of the world, China has the world's largest stash of for- eign-exchange reserves at more than $3 trillion. Much of that is dollars accumulated through its persistent trade surplus with the United States since the early 1990s. It has used those dollars to buy US bonds, the largest and most liquid pool of safe assets in the world. at means that China owns a lot of American debt. If China had to start selling off these Treasury bills, it would disrupt many markets by abruptly shifting the balance of supply and demand, driving down Treasury prices – making borrowing more expensive for the US government, and raising homeowners' interest rates, leading to an American slowdown. But that would also bring down the value of China's remaining Treasury holdings. e yuan is not fully free floating and Beijing's Treasury holdings are used to stabilise the yuan within a targeted range, against the dollar in particular. So that means any sharp depreciation in the US dollar would force Beijing to defend the yuan, in turn forcing the sale of more of its Treasuries. And the effect of that is known: in 2016, China's Treasuries holdings fell sharply by some $200 billion over six months, because the yuan depreciated on worries about the Chinese economy. Perils of the US-China trade war

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