Devaluation of the Renminbi, limiting export or more straining of capital flight are some options China’s government has to deal with its financial dilemma caused by the trade war, but – warns financial expert Victor Shih – all might also cause setbacks, he tells Reuters.
Meanwhile, the famed trade surplus the export powerhouse ran with the rest of the world has been shrinking.
Victor Shih, an associate professor of political economy at the University of California, San Diego, says currency devaluation could be an attractive option for China to offset the impact of the trade war.
But he warned the tactic had limits, as it “could create a panic on the renminbi which becomes difficult to control”…
Shih estimates that even a modest 20 percent reduction in exports to the United States could cause the monthly trade surplus to drop by $8 billion to $10 billion, nearly a third of the average. In addition, a reduction in foreign direct investment, which brought $136 billion into China last year, would also reduce forex inflows substantially, he added…
Shih said existing capital controls were very stringent.
“Even the billionaire class faces tight restrictions in terms of where they can invest money,” he said. “However, there are still ways, and it is likely that corruption is returning, which will undermine Chinese capital control measures.”
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