KUALA LUMPUR: The rising trade tensions between the US and China might spark off a currency war, cautions AmBank Research.
It said on Thursday the yuan has long been viewed to have been manipulated by the authorities in a move to support and place the Chinese economy in a more favourable position.
“It has now raised our concern as to whether China has enough ammunition to retaliate against any potential tariffs imposed by the US. China exports more to the US than it imports. Hence, the trade war could potentially favour the US and risk China running out of ammunition,” it said.
In late September, the US levied 10% tariff on a whopping US$200bil worth of Chinese goods, and the tariff is scheduled to rise to 25% in January 2019.
US President Donald Trump has also threatened additional tariffs on US$267bil worth of Chinese products, adding up to essentially everything China ships to the US.
Due to the rising pressure imposed by the US, AmBank Research said the worry is whether China will increasingly let the yuan slide further against the US dollar.
As at now, the yuan has fallen by 5.8% against the US dollar partly due to the trade war and also other factors such as rising US interest rates and the Chinese central banker injecting more cash into the banking system.
“Should China let the yuan slide further, it will further strain the bilateral tension between the US and China, raising the risk that China has clearly shifted in its currency policy, suggesting that it is running out of ammunition, heightening the risk of a global market panic as what happened in 2015.
“A cheaper yuan would likely push other emerging-market currencies to fall, including the ringgit against the US dollar and hit hard on those who have large exposure of US dollar debt.
“Besides, the cheaper yuan would anger Japan and the EU which have sought to join the US administration in a unified response to China’s trading practices in general,” said AmBank Research.
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