Yuan Devaluation Unlikely, Economists Suggest Alternative Strategies

Why in News ?

Amid escalating US-China tensions, there was speculation that China might devalue the yuan. However, economists believe China will use other economic tools, such as fiscal and monetary policies, to mitigate the impact of US tariffs without resorting to drastic devaluation.

Speculation on Yuan Devaluation:

  • The ongoing economic conflict between China and the US has raised concerns over the possibility of China devaluing its currency, the yuan.
  • The People’s Bank of China recently set its yuan fixing rate just below RMB 7.2 per US dollar, the lowest since September 2023, fueling speculation about a potential 30% devaluation to counteract US tariffs.
  • However, this has triggered concerns over its global impact, especially on currencies like the Indian rupee.

Alternative Strategies to Devaluation

  • Economists from Nomura and other global brokerages argue that China is likely to rely on alternative economic tools, such as fiscal and monetary policies, rather than pursuing a drastic currency devaluation.
  • China’s economic adjustments may involve negotiations with other countries to mitigate the impact of US tariffs.
  • Mitul Kotecha from Barclays Bank suggests a gradual depreciation of the yuan but warns against aggressive devaluation, which could lead to a competitive currency race in Asia.

Global and Indian Implications

  • Despite fears of a weaker yuan, economists note that the US dollar itself is weakening, which complicates efforts to devalue other currencies.
  • India, with a relatively lower export share in its GDP, may not be significantly affected by the US tariffs.
  • India is also seen as having a better position in trade negotiations with the US, potentially mitigating any adverse impacts.