Photo: Reuters/Thomas White
Photo: Reuters/Thomas White

As investors prepare for the biggest escalation yet in the Trump Administration’s trade war with China, the debate about the strength of the Chinese yuan rages on.

The currency saw a decline following previous rounds of tariffs, but since then there has been evidence that this was a controlled decline allowed by policymakers to blunt the impact of tariffs. Following the People’s Bank of China’s re-introduction of the “counter-cyclical factor” (CCF), the yuan has firmed up, indicating that Beijing has effective tools to steady the currency.

An expected new round of tariffs, affecting US$200 billion of Chinese imports, will, however, have a much larger impact relative to anything implemented thus far. Media reports indicate the tariffs could either come into effect as soon as this week, or be delayed or phased in. It is also unclear whether Trump will opt to set the tariff rate at 25%, as threatened, or will end up going with the 10% originally proposed.

Analysts at Chinese financial news outlet Caixin see the new tariffs having a limited effect on the yuan, though the impact may depend on the details of the tariffs implementation. The escalation is already priced into the market to some extent, but should the Trump administration choose to implement the tariffs on the full list of goods at the 25% rate this week, there is a greater chance of a shock.

Regardless of how the duties are imposed, the analysts wrote in a newsletter on Monday, the effectiveness of the tools at policymakers disposal, including the CCF, make it unlikely there will be a severe weakening of the yuan.

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