Money matters

Of late, a lot of attention has been put on the trade war between the United

States and the European nations (“China tempts Britain with free trade, says door to US talks open”, Gulf News, July 31). The US has raised tariffs on imported goods to protect its farmers. The European nations have retaliated by raising tariffs on the US manufactured goods.

Much attention has also been put on the trade war between the US and China. A look at the exchange rate data over the past one year reveals that in July 2017 the dollar was more than the Chinese yuan.

However, in April 2018 the Chinese yuan appreciated sharply against the US dollar. Since then, the currency steadily declined against the US dollar. According to the latest available data, the exchange rate currently stands at $1 = 6.78 Chinese yuan. Thus, the Chinese yuan has recently depreciated sharply against the US dollar. Firstly, a weak currency makes Chinese exports more competitive.

That is because the Chinese exports become relatively cheaper in the international market. An increase in Chinese exports, due to a weak yuan, may be able to offset the negative effects of high US tariffs on Chinese exports. Secondly, an increase in Chinese exports is expected to lead to a higher economic growth in China.

High economic growth, in turn, is expected to attract more foreign investment and also increase employment in the manufacturing and services sectors.

Consequently, the real estate prices in China will probably increase. Increase in house prices will call for government housing subsidies. If the trade war between the US and China persists, then a weak yuan may allow China to offset the negative effects of high US tariffs. On the face of a trade war between the two economic superpowers, a weak yuan may be a blessing in disguise for the Chinese economy.

From Mr Rajarshi Mitra

India