The stability and value of foreign currency are dependent on having a stable economic environment that is facilitated by favorable political atmosphere. China holds the largest foreign exchange reserves amounting to more than UD$ 3 trillion, which represents two-thirds of the foreign exchange reserves. China has been accused of manipulating the foreign exchange rates, which led to a dialogue between the US and China, where each party wants to express its power in foreign exchange markets leading to trade wars. The recent China-US War is anticipated to impact on the RMB monetary system. However, several theories have been put forward to determine the influence of China-US war on the RMB financial system. This paper will elucidate the impact of China-US war on the RMB monetary system from the perspectives established by the balance of payment theory and foreign exchange theory.
The China-US war is anticipated to reduce the value of Yuan, which will affect the ability of the reserves to provide a safety buffer required in the clearance of the Chinas debts and imports. The China-US war has caused a reduction in the Yuan value from 6.30 (Yuan to US dollar) to 6.90, which is accelerated by lack of Beijing intervention in foreign exchange markets (Yeung, 2019). With the continuity of the war, analysts speculate that an imminent balance of payment crisis may face China. For the Yuan to maintain stability, the exports and imports need to be balanced at the regular amounts that will, in turn, prevent deficits. According to the balance of payment theory, which is dependent on the demand and supply variables, the rate of exchange equals the balance of payment (Xiaoyan, n.d.).
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Therefore, a favorable balance of payment implies an increase in strength of the external value of the currency, while the unfavorable balance of payment translates to a decrease in the external value of the currency. In this case, the China-US war leads to an improper balance of payment, leading to direct depreciation of the RMD monetary value. If a currency crisis hits China, the rate of growth and stability will be affected as stagnant growth will be experienced. There is a need for a balance in the demand and supply of the imports and supply to prevent the depreciation of the Yuan, which will go a long way in maintaining the value of the currency in the international market.
China needs to concentrate on increasing the money inflows while reducing the money outflows; this is to act as a buffer against China failing to support its currency using the US dollars in the event of sudden economic crisis. The China-US war contributes to inefficiencies in China’s control system, which in turn affects the stability of the currency. The China-US war was accelerated by the imposition of tariffs on Chinese imports by President Donald Trump (Yeung, 2019). The tariffs have led to slower growth in China economy with increased capital outflow, which leads to a reduction in the US dollars in the domestic financial system. The tariffs account for the US$ 250 billion Chinese goods representing 25 percent on levies (Yeung, 2019). The maintenance of currency stability is achieved by preventing foreign reserves from decreasing from the current amount. China holds US$1.9 trillion of external debts making the foreign exchange reserves sufficient to gather for the imports of goods and services for at least one financial year.
The rise in the China-US war has led the China government to tighten the outbound money flow. Currently, Chinese bond issuance stands at US$ 1 trillion while the corporate debt stands at 155 percent of the Gross Domestic Product (Yeung, 2019). Since the start of the war, there has been slower growth in the Chinese Gross Domestic Product. The China-Us war has also caused the Chinese government to limit the withdrawal of US dollars in a single transaction to US$ 3,000. The tightening of the supply of the dollar tends to effects the legal foreign exchange deals.
The China-US war has caused self-inflicted damage to the global economy as the international monetary fund sees a reduction in the 2019 world growth focus to 3.2 percent which represents 0.1 percent point drop from the previous year (Tang, 2019). China is among the top global economies; the war tends to impact on the overall growth of the worldwide economy.
In conclusion, the Chinese Renminbi has been declining due to the high-interest rates imposed by the United States. This fall has been linked with currency devaluation ramping up bilateral tensions. Also, the decline is likely to hit the stock markets as well as leading to a possible increase in capital outflows. The actions against the Chinese foreign exchange are affecting the value of the Renminbi and leading to China losing its economic strength across the globe. The decreasing Renminbi values tend to affect the emerging-market currencies while making the debt burden unbearable. Such fluctuations can be restored by having Beijing propping up the money using the foreign exchange reserves.
References
Tang, F. (2019). US-China trade war caused ‘self-inflicted’ damage to the global economy, says IMF after third 2019 forecast cut. South China morning post . Retrieved on 27 July 2019 from https://www.scmp.com/economy/china-economy/article/3019732/us-china-trade-war-caused-self-inflicted-damage-global
Xiaoyan, F. (n.d.). Foreign Exchange theories. Fudan University, Lecture 3.
Xiaoyan, F. (n.d.). BOP Theories. Fudan University, Lecture 6.
Yeung, K. (2019). China is letting the value of Yuan slide to offset trade war tariffs, US Treasury Secretary Mnuchin says. South China morning post . Retrieved on 27 July 2019 from https://www.scmp.com/news/china/diplomacy/article/3013678/china-letting-value-yuan-slide-offset-trade-war-tariffs-us
