Opinion

Watch out for China’s currency in case of no-deal scenario

The U.S. and China’s negotiations on a phase-one deal seem to have stalled again. The market was already aware of the limited nature of the likely deal, but was still hoping for it. Against this backdrop, the investors have reacted negatively to the increased likelihood of not reaching a deal on December 15. If this is the case, the U.S. will apply additional tariffs on Chinese imports. The obvious question to address, thus, is, what can happen to China under such a scenario?

By: Date: December 11, 2019 Topic: Finance & Financial Regulation

We first need to realize that the so-called interim deal would still have left all the tough aspects, i.e. intellectual property protection, industrial policy subsidies, the role of SOEs, market access, etc., to a later stage. Given that the market has already lowered its expectations, a no-deal scenario might not be as catastrophic at it appears.

However, there is still one important aspect that one should be carefully examined, namely the RMB exchange rate. The Chinese economy has suffered from sluggish investment for a long time, and most of the government-led stimulus measures have so far failed to shore up investment confidence. And the situation has become more complicated by rising consumer prices, which further limit the PBOC’s policy room to ease. Devaluating China’s currency could turn out handy, as a more effective, and much needed, demand policy.

So far, the cost of devaluing the RMB is linked to the chances of reaching a deal with the U.S. If China realizes that all efforts on that front are futile, using the exchange rate to create external demand might become a priority. There is still a negative side effect which is the pass-through to inflation, but still, such pass-through might be low given the slack in the economy, compared to the need to gain competitiveness, which will be further hampered by additional tariffs.

All in all, whether an interim deal can be reached will have only limited consequences on the Chinese economy, but a sharp movement in China’s currency as a consequence of a no-deal scenario might be more influential.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

An EU - China investment deal: a second look

For the moment, it does not look like we have the basis for greater and deeper economic relations with China. However, dismissing China and the opportunities that it creates for global cooperation would also be a mistake.

By: Maria Demertzis Topic: Global Economics & Governance Date: January 19, 2021
Read article More on this topic More by this author
 

Opinion

Résilience : la nouvelle boussole

Pour surmonter le choc de la pandémie de Covid-19, l’économiste écarte, dans sa chronique, l’idée d’un repli protectionniste, mais suggère de passer d’un objectif de réduction des coûts à celui de la réduction des risques.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: January 18, 2021
Read article More on this topic More by this author
 

Blog Post

The double irony of the new UK-EU trade relationship

The Trade and Cooperation Agreement signed between the European Union and the United Kingdom goes against six decades of UK efforts to avoid being economically disadvantaged in Europe. Tracking the evolution of the EU-UK relationship over the last 60 years can help in understanding this.

By: André Sapir Topic: European Macroeconomics & Governance Date: January 12, 2021
Read article More on this topic More by this author
 

Opinion

Europe's disappointing investment deal with China

Why rush a deal that is so inherently complex?

By: Alicia García-Herrero Topic: Global Economics & Governance Date: January 4, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Deglobalisation in the context of United States-China decoupling

After decades of increasing globalisation, there now seems to be a slowing, or even a turn to deglobalisation, meaning decelerating trade and investment and reduced global value chains. This trend seems to have accelerated because of the United States’ push to contain China in the context of their strategic competition. So far, however, there is less evidence of deglobalisation in terms of financial flows.

By: Alicia García-Herrero and Junyun Tan Topic: Global Economics & Governance Date: December 21, 2020
Read article More on this topic More by this author
 

Blog Post

When and how should the European Union conclude an investment agreement with China?

A look into the potential Comprehensive Agreement on Investment between China and the European Union.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 17, 2020
Read about event Download PDF More on this topic
 

Past Event

Past Event

Europe and India: Comparing Approaches to Global Economic Challenges

Stakeholders from government, private sector, media and academia/institutions come together to review India-EU relations and point to a promising direction for the future.

Speakers: Yamini Aiyar, Suman Bery, Navroz K Dubash, Ignacio Garcia Bercero, Alicia García-Herrero, Rajat Kathuria, Gautam Mukhopadhaya, Ananth Padmanabhan, Georgios Petropoulos, André Sapir, Shyam Saran, Simone Tagliapietra and Guntram B. Wolff Topic: Global Economics & Governance Date: December 15, 2020
Read about event More on this topic
 

Past Event

Past Event

Towards post-pandemic green multilateralism?

How could we achieve a trilateral relationship between China, the EU and the US and consolidate it with climate goals?

Speakers: Huiyao Wang and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 10, 2020
Read article More on this topic More by this author
 

Opinion

A silver lining for ageing Asia

An ageing population is generally bad news for growth prospects, but Japan and Taiwan offer important lessons.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 8, 2020
Read article More on this topic More by this author
 

Opinion

Grading the big pandemic test

COVID-19 almost one year on, it is time to assess who passed the test, and who failed.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: November 27, 2020
Read article More on this topic
 

Blog Post

Europe is losing competitiveness in global value chains while China surges

The European Union owes much of its economic weight to its regional value chain and integration into the global value chain. But the EU’s global value chain role is shrinking, and while EU trade integration with China is increasing, it is mainly to China’s benefit, undermining the EU’s external competitiveness.

By: Alicia García-Herrero and David Martínez Turégano Topic: Global Economics & Governance Date: November 27, 2020
Read article
 

External Publication

European Parliament

Data flows, artificial intelligence and international trade: impacts and prospects for the value chains of the future

In-depth briefing and analysis on the issues of digital trade and the geopolitics of trade provided to the European Parliament.

By: Dennis Görlich, Michèle Finck, Georgios Petropoulos, Niclas Poitiers and André Sapir Topic: European Macroeconomics & Governance, European Parliament Date: November 26, 2020
Load more posts