Yuan slump to offset China tariff pain – Goldman Sachs

In a recent client note, Goldman Sachs’ Analysts argued that the declines in the Chinese Yuan on a trade-weighted basis will offset the drag on Chinese growth from the first two rounds of US tariffs.

Key Highlights (via Bloomberg):

“By helping China’s export competitiveness, the slump should boost the country’s gross domestic product by 40 to 50 basis points, which is enough to blunt the impact of U.S. levies on $250 billion of Chinese goods, Goldman economists led by MK Tang wrote in a note dated July 25.

Yuan depreciation is a relatively effective tool to cushion downward pressures on growth.

Potential policy considerations to avoid additional complications in the U.S.-China trade relationship and to mitigate domestic residents’ currency worries may restrain the scope for much further depreciation.

A 10 percent drop in the Yuan against the basket may boost export growth by about 6 basis points after a lag, adding around 80 basis points to GDP.

The notion that exchange rate depreciation can boost growth significantly without causing a large increase in inflation represents a favorable trade-off, given that the risk of high prices constraining policy easing is more important than the risk of overly low inflation.”

Goldman expects the Yuan to rise to 6.7 per dollar in three months -- up from 6.7818 Thursday -- amid broad dollar weakness. Risks are tilted to a weaker Yuan given possible further downward pressure from trade friction and softer domestic macro conditions.