A trade war with the US,
slowing economic growth, a slump in the stock
market – China’s economy is under pressure. And that is hurting
the currency. After hitting targets
like clockwork for years, even a small fall in China’s
economic growth is significant. GDP growth of 6.5 per
cent is China’s worst quarterly performance since the
depths of the financial crisis in 2008. This year’s stock market
plunge, down by nearly a third since January, is the worst
since the rout of 2015. Meanwhile, Donald
Trump’s rising tariffs on Chinese goods and
talk of a trade war are creating uncertainty
among investors. Tariffs would mean
there is less demand for Chinese goods and, in turn,
less demand for the renminbi. The renminbi is nearly at seven
against the dollar, potentially its lowest level for a decade. Hitting seven could unnerve
investors and trigger traders to pounce. It might also rattle
Chinese households, leading them to convert
savings into US dollars. But it may be the pace
of the decline that is more significant. Some economists
say investors are less likely to be spooked if
China’s central bank intervenes to support the currency
while letting it gently slip to seven. The size of China’s economy and
its importance to the region means a weaker renminbi
would almost certainly knock other currencies in Asia. And those with current
account deficits, where imports exceed exports,
such as India, Indonesia, and the Philippines,
would be most exposed. India is already
feeling the impact, as the rupee has hit
a series of new lows over the past few weeks. But a weaker renminbi
against the dollar would also weigh on
Chinese companies with dollar-denominated debt. The renminbi may not
be a reserve currency, but the size of
China’s economy means its value has far-reaching
ramifications for the world.