China is struggling to boost its exports to countries such as the Philippines and Vietnam amid a weakening yuan, a key Chinese demand.
But there is no guarantee the new foreign exchange rate will boost growth in the world’s second-largest economy, and analysts say there is a danger China will not be able to absorb the costs of the shift to the yuan and may not have the resources to keep the new exchange rate stable.
China is also struggling to cut tariffs on imports from countries such a Vietnam, Malaysia and Indonesia, as it tries to boost demand and reduce trade deficits.
Analysts say the moves are likely to cause a backlash, prompting more Chinese companies to move their headquarters overseas.
The move is a gamble for China, which has been battling a weakening currency, a shrinking economy and an economy that is expected to shrink by 6.6 per cent in 2018.
“This devaluation will hit us hard,” said Chen Jianhua, an investment strategist at CIBC World Markets.
We have to get out of the dollar zone and be able do our business in other currencies, so we are going to have to make adjustments.
“Analyzing the moves in China’s trade with other countries, economists say they will cause volatility in the economy, as Chinese companies will look to reduce their costs of doing business and the yuan will weaken.
Vietnam has said it will import up to $50bn of Chinese goods, and Malaysia and Vietnam have said they will also export up to about $60bn.
As China is seeking to boost growth and reduce the need for foreign currency, it has been increasing exports of goods and services to countries including Japan, South Korea and the United States.
In a recent report, Chinese state media said it was seeking to open up more overseas markets for domestic consumption and foreign investment.
On Wednesday, China said it would boost imports of crude oil from Brazil, which is already one of the world most expensive oil producers.
However, analysts say that will only fuel inflation and could make imports of Chinese products even more expensive.
There is also a risk that if China cannot continue to export to the United Kingdom, it may pull back from its current commitment to buy British oil, which it is keen to do.
At the same time, China may decide to keep more of its money abroad, which could have a big impact on the value of its currency.
Chinese Premier Li Keqiang has also said that he will step down if he can’t be trusted to keep up with the demands of the people and society, and to ensure the country does not face a second world war.
More to come.