How Will The Chinese Exchange Guides Affect Global Trade

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How Will The Chinese Foreign Exchange Guides And Reserve Management Policies Affect Global Trade

Days before his inaugurations as the next US president, Trump is already picking up fights with China. Apart from questioning the validity of the One China Policy that acknowledges Beijing and Taiwan as one in US-China trade, Trump is also challenging China’s constant currency devaluation practices. He believes that Beijing is only constantly devaluing the currency to keep the dollar exchange rate high so as to gain the export market share. But is this the case?

To prove him wrong, the People’s Bank of China came up with four foreign exchange and reserve management policies meant to caution the Yuan against the looming domestic woes facing it. But what are their impacts on the future of Yuan and global trade? Here are the four policies as well as a breakdown of their effects on the global currency and business markets.

  1. Maintaining stability of the foreign exchange reserves

This principle places a higher value on the relative stability of the currency reserves that that of the Yuan currency. It also means that in future, the People’s Bank of China will not unduly sacrifice the forex reserves in the name of stabilising the Yuan currency. With the hint that China will no longer be devaluing its currency against equally bigger currencies in the world, you are bound to witness more competitiveness between Yuan and the Dollar whose effect will be felt across the board.

  1. The Yuan should not weaken more than other currencies against the dollar

The people’s bank of China will not allow the Yuan to weaken further than the rest of the leading world currencies against the dollar. This means that China will probably weigh in should the dollar irrelatively rise in strength against the Yuan in the global markets. This improves traders confidence in the Yuan backed by the fact that, should it trip in the face of the dollar; the Peoples Bank will always come to its aid thereby shelving them additional losses.

  1. The people’s bank will reduce its dollar assets held as forex reserves

The Chinese government will gradually reduce its size of its US Treasury holdings. This restores traders confidence in the genuine US- China trade without fear of underhand devaluation deals meant to keep deprive the US dealers of export gains.

  1. Investment into the ”One Belt, One Road” countries

This means that China will soon be shifting investment attention from the United States and investing equally heavily in countries in Europe, Russia, South Asia and Southeast Asia as well as the Middle East. The fact this attention shift collides with Saudi Arabia’s vision 2030 in which the country seeks to strategize itself as a trade and manufacturing hub signals a paradigm shift in global commerce. Should such a move succeed, the American economic supremacy would have suffered a major blow. Such a move also serves as a pointer for investors seeking less competitive yet rewarding hubs.

Bottom line

As domestic market currency performance indicates, China may not have been playing games with the Dollar with its three consecutive "devaluations". But its newly released forex exchange policies are clear indicators that it seeks to neutralise the global dominance of the dollar and American trade. These new markets will most probably offer better business deals and investors should, therefore, either join or brace for the upcoming changes.

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