LS SECURITIES evaluated on the 9th that there would be more disadvantages than advantages regarding the claim that China could play the yuan depreciation card against U.S. tariffs.
The Donald Trump administration plans to impose an additional 34% tariff on China starting at 1 p.m. on this day in Korean time. An additional tariff of 50% could be immediately followed in response to China's retaliatory tariffs. When considering existing tariffs, a tariff of 104% to 106% will be imposed on Chinese products.
There are also prospects that the Chinese government will maintain a tough attitude, stating that it will fight to the end, while allowing for yuan depreciation. The People's Bank of China announced the USD/CNY official exchange rate at 7.2038 yuan. Baek Kwan-yeol, a researcher at LS SECURITIES, noted, "Some interpret that as the official exchange rate surpasses the psychological resistance level of 7.2 yuan, the Chinese government is deliberately allowing yuan depreciation to send a signal that it will confront the high tariff threats from the U.S."
However, researcher Baek predicted that if the yuan depreciates further, it would put pressure on the Chinese stock market and domestic economy. The situation now is different from that during the first Trump administration. In March 2018, when the U.S.-China trade war began, the yuan exchange rate was around 6.3 yuan, so allowing depreciation was relatively less burdensome. In contrast, the current exchange rate is at its highest level since the 2015 exchange rate reform, which poses significant risk factors when considering China's foreign exchange reserves in relation to its GDP, according to researcher Baek.
This contradicts the Chinese government's trend announced last month of "expanding consumption through asset appreciation, including stocks." The sharp depreciation of the yuan is likely to lead to capital outflows and an economic recession. Researcher Baek stated, "Additional yuan depreciation is not a reasonable strategy at this point, where boosting consumption is inevitable to achieve the government's annual 5% growth target."
Researcher Baek predicted that the uncertainty of the Chinese stock market in the second quarter of this year (April to June) will increase as the possibility of improving U.S.-China relations in the short term is slim and the Chinese government's tough stance could either be a strategy or arrogance that needs further observation.
Researcher Baek also stated, "China will likely take only minimal gestures since the practical benefits of attacking the U.S. are limited, and will focus on internal economic stimulus policies," adding that an aggressive stimulus plan is expected to be prepared before the Politburo meeting at the end of this month.