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Investors have been keeping a close watch on the Chinese yuan, seen as a key indicator amid the intensifying U.S.-China trade war — and much concern has been centered on whether it will breach the 7 yuan per dollar key level.



What a weak yuan does

A weaker yuan has been a key source of contention between U.S. and the China, with U.S. President Donald Trump accusing Beijing of intentionally letting its currency slide lower. A weaker yuan makes Chinese exports more attractive, giving them a competitive advantage in international markets, some experts argue.

However, a rapidly weakening currency could also lead investors to move their money out of China, analysts warned, although they said Beijing could respond by imposing tighter capital controls — or measures aimed at limiting the outflow of foreign capital.

The currency slide would also hurt Chinese firms, as well as the country’s push for greater use of the yuan internationally, according to Khoon Goh, head of Asia research at ANZ Bank.

While a weaker yuan would offset the costs of higher tariffs, there are also disadvantages, Goh told CNBC on Thursday.



Ripple effect

Other analysts have warned that a weakening yuan could also hurt other Asian economies.

Arthur Lau, co-head of emerging markets fixed income at PineBridge Investments, said a weakened yuan could hit regional currencies and lead to higher costs for those who issue dollar-denominated bonds.

“A weakening yuan could weigh on currencies in the region. Weaker local currencies imply higher debt servicing cost for U.S. dollar bonds,” he said in a note.



Risks to yuan’s internationalization

The drive to internationalize the yuan could also be hit.

China has “made a lot of strides to get renminbi included in the ... equity markets, in the MSCI, and this year, the bond market got included in the Bloomberg Barclays index, ” said Goh from ANZ Bank.

As Chinese assets are increasingly traded in global markets, more foreigners will need to trade in the yuan, which is the intent of the internationalization drive. But a weak yuan will also reduce investor confidence.

Analysts estimate that the full inclusion in the Bloomberg Barclays index will attract around $150 billion of foreign inflows into China’s roughly $13 trillion bond market, while the MSCI inclusion will also attract billions of inflows.



Reference: CNBC

Read more: https://www.cnbc.com/2019/05/31/what-happens-if-the-chinese-yuan-breaches-the-7-to-the-us-dollar.html