The relationship between China and the United States headed toward a more delicate and complex phase when, on August 1, the Trump administration announced tariffs on an additional $300 billion of Chinese goods, highlighting the failure of the meeting between Xi Jinping and the American president at the G20 summit in Osaka, Japan.

This inspired little confidence among members of the international community, who were alarmed to see tensions escalate. The US tariff move was not as successful as the Trump administration had expected. The “Tariffs Hurt the Heartland” campaign underlined how farmers and manufactures are being hit by the negative consequences of the trade war, with losses caused by Chinese retaliation on agricultural products imported from the United States and by higher taxes.

Several American companies are concerned about the costs they are facing, and the dissatisfaction leaves room to wonder if the commercial measures implemented by the government are exclusively intended to protect citizens’ interests or rather to contain China’s influence, which is challenging the US’s leadership status.

On the other side, Beijing could not remain passive in the face of aggressive American economic policy. Last Monday, the People’s Bank of China set the yuan’s daily reference rate at 6.9225 per dollar, leading to the devaluation of the currency to support the manufacturing sector. Indeed, exchange rates have a central importance on the international chessboard, where devaluation makes national exports cheaper, thanks to a fall in the price of goods. This can also boost production due to increased foreign consumer demand.

Trump harshly accused China of “currency manipulation,” sparking a debate on whether or not the trade war will become a currency war

Trump harshly accused China of “currency manipulation,” sparking a debate on whether or not the trade war will become a currency war. But Chinese experts and authorities said they refused to engage in a competitive devaluation, rejecting any criticism.

However, the yuan depreciation could have serious repercussions even within the Asian nation where the strategy could slow down the progress made in the internationalization of the currency, a plan launched in 2009 with the promotion of offshore yuan liquidity hubs whose main goal is to develop the utilization of the currency in trading and investments even outside China.

In the framework of the yuan’s global journey, China studied different steps to internationalize the currency, which could be analyzed following the “functional approach” suggested by Yongding Yu, an academic at the Chinese Academy of Social Sciences:

  • Making the yuan available to non-residents thanks to the promotion of its use for imports from Hong Kong, along with the accumulation of yuan assets within the special administrative region fostered by mechanisms created to pay favorable interests on deposits with Chinese banks, attracting more investors.
  • Giving to PRC’s importers the chance to use the yuan as a settlement currency. This stage is strongly influenced by variations in exchange rates and by market expectations of them, which in turn influences businesses that would like to use it for trade invoicing.
  • Denominating financial transactions with the sale of panda bonds. In 2005, the Asia Development Bank and the International Finance Corporation were authorized to issue the first two bonds, opening up the onshore bond market in China. In spite of the warm growth, in 2015 panda bonds were back to play an interesting part within the financial world when foreign central banks and organizations were allowed to issue them in the China Interbank Bond Market. According to the World Bank, panda bonds’ volume will exceed 320 billion yuan by 2020.
  • Providing liquidity through yuan swaps with foreign central banks, which can sell an amount of their currency, obtaining yuan deposited in accounts held with the People’s Bank of China. Over the years, 30 countries, including Ukraine, Brazil, Japan, Malaysia, South Korea, Australia, and the United Arab Emirates were involved in these arrangements.

The internationalization of the yuan could represent for Beijing an essential element needed to complete the construction of the “Chinese Rejuvenation,” a project that goes beyond the lines marked by financial and economic purposes to also embrace a common dream with solid cultural and historical roots. However, the efforts and the commitment needed to facilitate the rebirth of China could appear difficult to interpret by Western counterparts, especially the United States.

Currency wars, as well as trade conflicts, are a signal of the lack of adaptability to the new multipolar order’s features, where protectionist policies cause impairment for all the actors in the global and interconnected economy.