(Tiểu luận FTU) the impact of china devalueing the yuan from 2015 2020

FOREIGN TRADE UNIVERSITY MACROECONOMICS THE IMPACT OF CHINA DEVALUING THE YUAN IN THE PERIOD OF 2015 – 2020 GROUP: GROUP MAJOR: INTERNATIONAL BUSINESS ECONOMICS – K57 CREDIT CLASS: KTEE402.1 INSTRUCTOR: Ph.D HOANG XUAN BINH Ha Noi – 03/2020 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MEMBER LIST FULL NAME STUDENTS’ ID BÙI LÊ SONG AN 1811150039 NGUYỄN THẾ DŨNG 1810150007 NGUYỄN NGA LINH 1811150094 VŨ TIẾN LONG 1811150099 NGUYỄN MINH HIỂU 1811150077 NGUYỄN MẠNH HÙNG 1811150083 NGUYỄN TUẤN THÀNH 1810150028 HOÀNG PHƯƠNG THẢO 1811150122 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS INTRODUCTION I OVERVIEW OF CHINA DEVALUING THE YUAN History Of China's Currency Devaluation (2015-2020) Reasons behind China’s currency devaluation 2.1 This Is A Fact Consistent With The Market Fundamentals 2.2 This Will Pave The Way For China’s Exporting Products .7 2.3 This Will Have Big Influence On IMF And China’s Desire To Become The Reserve Currency II THE KEY DRIVER OF THE TRADE WAR The Impact Of China's Currency Devaluation On China - US Trade War Scenario Development III HOW CHINA'S CURRENCY MOVE AFFECTS VIETNAM ECONOMY .13 That China Devalues The Yuan May Harm Vietnam’s Trade 13 Vietnam Acts With Composure 14 CONCLUSION 16 REFERENCE 17 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com INTRODUCTION The global economy has witnessed a series of trade disputes between China and the US since January 2018, when the US government imposed safeguard tariffs on many residential machines (Taylor & Francis, 2018) These conflicts have engendered a full-fledged trade war On August 5, 2019, the People's Bank of China set the Yuan’s daily reference rate below per dollar for the first time in over a decade (Investopedia, 2020) This, in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Trump administration, set to go into effect September 1st, 2019 (Investopedia, 2020) It is just the latest salvo in the U.S China trade war, but certainly not the first time China has devalued its currency The U.S Treasury Department officially named China a currency manipulator on August 5th, 2019 It was the first time the U.S had done so since 1984 (Investopedia, 2019) While mostly a symbolic move, the naming opens the door for the Trump administration to consult with the International Monetary Fund to eliminate any unfair advantage China's currency moves have given the country (The Guardian, 2017) This paper studies the current trade war between China and the US from an action, that China devaluing the Yuan By discovering about History of China's currency devaluation (2015-2020), we reveal the reasons behind China's currency devaluation, the key driver of the Trade war, and specially impact of that act on Vietnam LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com I.OVERVIEW OF CHINA DEVALUING THE YUAN 1.History Of China's Currency Devaluation (2015-2020) Yuan/ Dollar Historical Chart (Macrotrends, 2020) From Aug 11, 2015 to the end of 2016, Yuan devalued by 12 percent On August 11, 2015, the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the Yuan renminbi or Yuan (CNY), knocking over 3% off its value Since 2005, China’s currency had appreciated 33% against the U.S dollar, and the first devaluation marked the most significant single drop in 20 years While the move was unexpected and believed by many to be a desperate attempt by China to boost exports in support of an economy that was growing at its slowest rate in a quarter century, the PBOC claimed that the devaluation was part of its reforms to move towards a more market-oriented economy The move had substantial repercussions worldwide (Macrotrends, 2020) From end of 2016 to Feb, 2018, RMB has appreciated by 9.4 percent against the US dollar (Macrotrends, 2020) LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com On August 5, 2019, the People’s Bank of China set the Yuan’s daily reference rate below per dollar for the first time in over a decade Global markets sold off on the move, including in the U.S where the DJIA lost 2.9% in its worst day of 2019 to date (Investopedia, 2020) Reasons behind China’s currency devaluation Currency devaluation is nothing new From the European Union to developing nations, many countries have devalued their currency periodically to help cushion their economies However, China's devaluations could be problematic for the global economy Given that China is the world’s largest exporter and its second-largest economy (Investopedia, 2019), any change that such a large entity makes to the macroeconomic landscape has significant repercussions This part aims at providing information about the reasons why China devalued its currency during this period 2.1 This Is A Fact Consistent With The Market Fundamentals Although a lower-valued Yuan does would give China somewhat of a competitive advantage, trade wise (which will be explained in the next part), the move was not totally counter market fundamentals Over the past 20 years, the Yuan had been appreciating relative to nearly every other major currency including the U.S dollar Essentially, China’s policy allowed the market to determine the direction of the Yuan’s movement while restricting the rate at which it is appreciated (Investopedia, 2019) But, as China’s economy had slowed significantly in the years prior to the devaluation while the U.S economy had improved A continued rise in the Yuan’s value no longer aligned with market fundamentals.  These actions, implemented by PBOC was a necessary adjustment rather than a beggar-thy-neighbor(a term used for a set of policies that a country enacts to address its economic woes that, in turn, actually worsens the economic problems of other countries) (Adam Heyes, 2019) manipulation of the exchange rate While the drop in the value of the Yuan was the largest in two decades, the LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com currency remained stronger than it had been in the previous year in tradeweighted terms 2.2 This Will Pave The Way For China’s Exporting Products Due to the low cost of the national currency, goods produced in China are cheaper for foreign buyers For example, if the Yuan fell by 5% against the dollar, a laptop made in China would be 5% cheaper to purchase (Rufat Safarli, 2019) Moreover, if China devalues its currency to match US tariffs, then American business partners will not have to overpay for Chinese goods In other words, by cheapening the Yuan, Beijing seeks to circumvent the trade restrictions imposed by Donald Trump and keep exporting its goods to the United States Against this backdrop, the ambitions of Donald Trump to free the domestic market from Chinese competitors and thereby stimulate the national business, will be unsuccessful However, controls on the currency have given Chinese businesses a high degree of predictability when they plan investments in industries heavily dependent on exports (The Guardian, 2017) 2.3 This Will Have Big Influence On IMF And China’s Desire To Become The Reserve Currency There was also another motive for China's decision to devalue the Yuan — China's determination to be included in the International Monetary Fund's (IMF) special drawing rights (SDR) basket of reserve currencies (the SDR is an international reserve asset that IMF members can use to purchase domestic currency in foreign exchange markets to maintain exchange rates) The IMF reevaluates the currency composition of its SDR basket every five years In 2010, the Yuan was rejected on the basis that it was not "freely usable.” But the devaluation, supported by the claim that it was done in the name of marketoriented reforms, was welcomed by the IMF, and the Yuan did become part of the SDR in 2016 ((Investopedia, 2019) Within the basket, the Chinese renminbi had a weight of 10.92% (Investopedia, 2019), which is more than the weights of the Japanese yen (JPY) LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com and U.K pound sterling (GBP), at 8.33% and 8.09% (Investopedia, 2019), respectively The rate of borrowing funds from the IMF depends on the interest rate of the SDR As currency rates and interest rates are interlinked, the cost of borrowing from the IMF for its 188 member nations would now hinge in part on China's interest and currency rates II THE KEY DRIVER OF THE TRADE WAR The Impact Of China's Currency Devaluation On China - US Trade War The China–United States trade war is an ongoing economic conflict between the world's two largest national economies, China and the United States (Wikipedia, 2019) In recent years, China has experienced rapid growth and become a major economic power For instance, China’s production volume now ranks second worldwide, and China’s GDP has already surpassed the US in purchasing power parity terms The competition between the two superpowers became increasingly stiff in the context of American power with signs of deterioration while China is revealing the ambition to replace the U.S as a dominant position in world geopolitical chessboard Earlier this month the US officially accused China of manipulating its currency “to gain unfair competitive advantage in international trade” China set the value of its currency, the Yuan, to equal the value of a basket of currencies that includes the dollar China allowed the Yuan to fall below the 7:1 Yuan to Dollar peg it has maintained since 2015, setting off a day of intense selling in global markets In the U.S., the Dow Jones Industrial Average fell 2.9% on Monday, its worst daily decline all year (Investopedia, 2019) In other words, China pegged its currency to the dollar using a modified fixed exchange rate When the dollar lost value, China bought dollars through U.S Treasurys to support it (Crsreports.congress.gov, 2019) President Trump pressed the Federal Reserve to counter by pushing down the dollar’s value and pushing up the RMB Actually, the Treasury, not the Fed, LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com has authority over such actions but did not institute measures to that (TheHill, 2019) Later that day, the U.S Treasury Department promptly labeled China a "currency manipulator” China disputed the charge accusing the US of “deliberately destroying international order” with “unilateralism and protectionism” The International Monetary Fund (IMF) appears to be on China’s side, arguing the devaluation of the Yuan is largely in line with worsening economic conditions in China (Rushe, 2019) Some believed that China’s devaluation of the Yuan was just the beginning of a series of competitive devaluations - a currency war - that could lead to increasing trade tensions Scenario Development  The accusations of China's unfair trade practices are nothing new among almost presidential debates before However, just coming to the era of Trump, has the issue been an official declaration of acquisition by the US Government Along with other factors, the consecutive Yuan’s devaluation has sparked the trade war between the US and China since July 2018 The slide in value comes as the U.S and China remain locked in a trade dispute As things stand, the US has slapped tariffs on billions of US$ worth of Chinese products such as steel and soy products and has threatened tariffs on many more billions In response to additional U.S tariffs, China's central bank also weakened the Yuan in the retaliation, following by tariffs of its own Since then, the two countries continued to threaten each other by releasing lists of proposed tariffs on various goods Also, there have been multiple rounds of talks between trade representatives from the two nations taken place in both capitals Washington DC and Beijing But the steps on tariff escalation, on the other hand, fight against all those efforts.  LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The US-China Trade war timeline(Source: Peterson Institute for International) Economics (PIIE) 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The chart above integrates the timeline of the US-China trade war with key events of note occurring so far.  This chart was adapted from data available in Chad P Bown's forthcoming blog post, “Tariff worries remain after two years of the trade war and despite a phase one deal Overall, the trade war has proceeded in five stages since early 2018:  The first six months of 2018 featured only a moderate increase in tariffs.   The months of July through September 2018 resulted in a sharp tariff increase on both sides: US average tariffs increased from 3.8 percent to 12.0 percent, and China's average tariffs increased from 7.2 percent to 18.3 percent.   In stage three, there was an 8-month period (September 25, 2018, through June 2019) of little change in tariffs.   From June to September 2019, another set of tariff increases kicked in.   In the current stage five, and despite the phase one agreement, tariffs between the two countries remain elevated and are the new normal.(PIIE, 2020) The settlement seemed to be hopeless until both the US and China have thrown in the towel in terms of reaching a “Phase One” deal This move is considered to turn down the heat on their trade war Details of the agreement have emerged slowly Last October, the White House claimed that China agreed to significantly increase purchases of U.S agricultural goods China has also promised to relax limits on foreign investment in its financial sector, which would create opportunities for U.S investment banks to enter a growing market In exchange, Trump slashed tariffs on $112 billion worth of Chinese imports, lowering duties from 15 to 7.5 percent He also suspended tariffs previously slated to hit another $160 billion in Chinese goods (TheHill, 2020) 11 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Though very little has been said about intellectual property protections Theft of trade secrets was one of Trump’s primary justifications for his tough stance on China But a modest deal at this point may be better than no deal at all (TheHill, 2020) With a lot of issues stated in the 86-page agreement, in terms of currency problems, China and the United States also made certain commitments regarding the operations of their central banks in foreign exchange markets They pledged not to engage allowing their currency values to fall so that goods are cheaper Also, a senior U.S official said the currency rules would be enforceable, meaning that a violation could be punished with more tariffs (POLITICO, 2020) However, mentioning the case that Trump administration formally declared China a currency manipulator this summer, many experts said at the time that acquisition was unwarranted since China meets only the first of three criteria, according to the Treasury's report on the currency manipulation topic in May 2019, even if China had unfairly devalued its currency in the past Therefore, it seems uncertain to make sure that the next dual currency-related moves have enough evidence to bring out and come to the punishment part according to the deal A weakening currency itself can also spur capital outflows from the wealthy seeking to protect their savings from devaluation Such outflows can be difficult to control, forming a feedback loop in which downward pressure on a currency causes more selling, as more investors rush to cash out of their investments.  In the end, these chains will create a vicious cycle following a falling currency That is a case interrupted by the external factors which can’t be denied 12 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com III HOW CHINA'S CURRENCY MOVE AFFECTS VIETNAM ECONOMY That China Devalues The Yuan May Harm Vietnam’s Trade As the trade war escalates, China has weakened its currency to boost exports, making its goods even cheaper in Vietnam The moves made Chinese imports much cheaper, adding that Vietnam had to balance between controlling the trade deficit and being able to compete with cheaper Chinese goods in the market Vietnam, which heavily trades with China, will face greater trade deficit risks after the Yuan was devalued, giving Chinese exports a significant competitive edge, economists said For many factors, previously, Chinese exports were already cheap compared to those from other countries The devaluation will make them even cheaper, increasing their export market competitiveness, including Vietnam China is Vietnam's top trading partner, but the world's second-largest economy benefits more from the partnership Vietnam exported $41.41 billion worth of goods to China, but spent $75.45 billion on importing products from the northern neighbor last year (General Department of Vietnam Customs, 2019) Local products would fail to compete in the domestic market against cheap Chinese goods Meanwhile, Vietnamese producers would find it harder to export their products to China and other markets because of higher prices compared to similar products originated from China Business groups in the manufacturing, mass production, textile and leather goods industries can import machinery from China at a better price than they currently are, which could generate short-term advantages However, sustained business development is not foreseen in the long term (Thanhniennews, 2015) 13 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The Government will have to decide either to devalue the Vietnamese đồng further against the US dollar to support exports and avoid cheaper Chinese goods to flood in the local market, or keep the dollar/đồng exchange rate stable to avoid increased public debt and control inflation as the US-China trade war accelerates Vietnam Acts With Composure While businesses believe it is important to devalue the dong just like other countries did with their currencies, economists agree with Vietnam's State Bank that the fall in the value will not bring the desired results Nguyen Bich Lam, general director of the General Statistics Office (GSO) said at a press conference in late September that the devaluation of the dong may bring ‘reverse effects’ (Vietnamnet, 2019) Several firms have urged State Bank of Vietnam (SBV) to devalue the Vietnam dong in order to boost exports which have been moving slower The exchange rate, however, isn't just the method used to accelerate exports The question of imports also needs to be considered The imports will become more costly once the local currency loses its value So far this year, many countries around the world have devalued the local currencies in an effort to limit the trade war's effects In the meantime the value of Vietnam's dong was stable Only Vietnam dong and Thailand baht remain stable in ASEAN, or have appreciated against the dollar in the context of the Chinese Yuan's continued depreciation Chief economist of BIDV Can Van Luc said the currency used in payment remains the US dollar, while the prices of contracts were fixed When the Chinese Yuan depreciates and the dollar value increases, Vietnamese enterprises will get bigger benefits when converting from the US dollar into Chinese Yuan Since it is difficult to predict the next happenings of the USChina trade war, it is impossible to say about the impact on Vietnam businesses’ operations in the medium and long term Luc advised enterprises to keep close 14 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com watch over the situation and the assessments about exchange rate risks Some commercial banks have slashed the lending interest rates since August 1, 2019 Dinh Quang Hinh from VnDirect Securities commented that banks have taken flexible moves in accordance with market fluctuations, suitable to Vietnam’s conditions However, the interest rate reductions have been applied only at some banks which have capital, but this is not common in the banking system (Vietnamnet,2019) Although the SBV may be under pressure to depreciate, the SBV will take measures to prevent the VND from devaluating too deeply (over 3%) to avoid the risk of US “currency manipulator” listing because of VND has been devalued in the recent years (VOV, 2019) Vietnam exchange rate against USD(Focus Economics, 2017) It would be hard to achieve the nation’s target of keeping inflation below percent this year, not to mention other factors such as higher oil prices and natural disasters If Vietnam decided to move forward with devaluing the dong, the adjustments should be based on market demand and not on the Yuan’s value   15 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONCLUSION Currency devaluation is nothing new From the European Union to developing nations, many countries have devalued their currency periodically to help cushion their economies However, China's devaluations could be problematic for the global economy Given that China is the world’s largest exporter and its second-largest economy, any change that such a large entity makes to the macroeconomic landscape has significant repercussions With Chinese goods becoming cheaper, many small- to medium-sized export-driven economies could see reduced trade revenues If these nations are debt-ridden and have a heavy dependence on exports, their economies could suffer For instance, Vietnam, Bangladesh, and Indonesia greatly rely on their footwear and textile exports These countries could suffer if China's devaluations make its goods cheaper in the global marketplace China's justification for devaluing the Yuan in 2015 was the rise of the U.S dollar, and the country's desire to shift to domestic consumption and service-based economy While fears of further devaluations continued on the international investment scene for another year, they faded as China's economy and foreign exchange reserves strengthened in 2017 However, China's recent moves in 2019 will continue to send ripples across global financial systems, and rival economies should brace themselves for the after-effects.(Investopedia, 2020) 17 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com REFERENCE Taylor & Francis (2020) Understanding the China–US trade war: causes, economic impact, and the worst-case scenario [online] Available at: https://www.tandfonline.com/doi/abs/10.1080/20954816.2019.1595328 [Accessed Mar 2020] Investopedia (2020) The Impact of China Devaluing the Yuan [online] Available at: https://www.investopedia.com/trading/chinese-devaluation-Yuan/ [Accessed Mar 2020] Investopedia (2019) The U.S Labels China a Currency Manipulator [online] Available at: https://www.investopedia.com/the-u-s-treasury-officiallylabels-china-a-currency-manipulator-4766799 [Accessed Mar 2020] The Guardian, 2017 Why has China devalued its currency and what impact will it have? 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I.OVERVIEW OF CHINA DEVALUING THE YUAN 1.History Of China' s Currency Devaluation (2015- 2020) Yuan/ Dollar Historical Chart (Macrotrends, 2020) From Aug 11, 2015 to the end of 2016, Yuan devalued... international trade” China set the value of its currency, the Yuan, to equal the value of a basket of currencies that includes the dollar China allowed the Yuan to fall below the 7:1 Yuan to Dollar... would now hinge in part on China' s interest and currency rates II THE KEY DRIVER OF THE TRADE WAR The Impact Of China' s Currency Devaluation On China - US Trade War The China? ??United States trade