China’s devaluation of the yuan will have a “significant” impact on the global economy, according to a new analysis by Deutsche Bank, with a possible knock-on effect on its trade with the US and Europe.
The move will impact Chinese imports and exports to the US, which are among the largest in the world.
The move will also reduce demand for US exports, particularly agricultural goods, said Deutsche Bank economist Brian Murphy, who is also an associate professor at the University of Michigan.
China’s economy has grown at more than 7 per cent per year for the past year.
“The dollar is the world’s reserve currency,” Murphy said.
“The world has to worry about this.
It will be a real impact on global trade.”
China devalued its currency, the renminbi, to 6.8 per cent from 6.7 per cent earlier this month to make a strong case for its inclusion in the World Trade Organisation (WTO), which aims to keep it competitive against world rivals such as the US.
The devaluation also triggered a sharp drop in the value of the Yuan, which dropped to $1.21, below the $1 mark it had been at at the start of the year.
While the currency fell, it did not significantly change the world economy, with China’s manufacturing output rising by almost 10 per cent in the first quarter, which will have an effect on wages in the US as well as the wider economy, Murphy said in an interview.
China is the third largest economy in the global system after the US that is expected to grow by more than 9 per cent this year.
The Chinese economy is projected to grow 1.2 per cent next year.
Murphy said the impact on Chinese exports to Europe is not likely to be as big.
“It will not be as significant as the drop in prices for the US,” he said.
China has already imposed currency controls in the wake of the US’s decision to impose a temporary $1 trillion trade ban on it, which was followed by the WTO’s imposition of a similar ban on its trading partners, but Murphy said it was unclear whether the sanctions would be enforced.
“There is a lot of uncertainty about whether there is going to be a permanent trade ban or whether it is going through a temporary phase,” he added.
China’s trade with Europe was estimated to be $15.2 billion in the second quarter of this year, down by $4.7 billion from the previous year.
This was driven by a slowdown in Chinese exports of steel and chemicals, as well iron ore, which accounts for more than 80 per cent of China’s exports.
The US has not imposed any restrictions on China’s trade in these two areas, though Murphy said that would change if the US imposed a temporary ban on the renmiao.
“It is a long shot that there would be a temporary trade ban,” Murphy added.
“I think the risk is that it will be temporary and then the US would impose a permanent ban.”
While the impact will be felt globally, Murphy expects it to be felt in the United States.
“This could have a profound effect on the US economy,” he predicted.
On Friday, the US Treasury Department said that it was not considering an emergency trade freeze on China.
“We do not see the potential for trade disruptions or disruption of business,” the department said in a statement.
While the effect will be immediate, the impact of a trade ban could be long-lasting, with Chinese exports already declining by at least 25 per cent to $3.8 billion in July.
The impact could also be felt across China’s domestic economy, where manufacturing and agriculture are key sectors, which could have an impact on wages.
China’s export decline has also hit the services sector, where exports of everything from machinery to carpets have also dropped.
“A reduction in domestic demand could be one of the main reasons behind the slowdown in exports to China,” said Murphy.
Chinese imports are estimated to have increased by about 30 per cent since the start.
In the first nine months of the current year, imports of US products increased by more in dollar terms than in yuan terms, the latest figures from the Commerce Department show.