What happens if the Chinese yuan breaks $ 7 into US dollars

Investors have watched the Chinese yuan, seen as a key indicator in the midst of the intensifying US-China trade war – and much concern has been centered on breaking the 7-yuan-dollar key level. [19659002] While it is said that it is only a psychological level, the markets may react if the yuan falls below 7, leading to real economic costs for China and its companies, experts said.

Yuan has been testing these levels increasingly, as trade wars between the world's two largest economies worsened in recent weeks.

What a weak yuan does

A weaker yuan has been an important source of controversy between the United States and China, with President Donald Trump accusing Beijing of deliberately letting his currency push lower. A weaker yuan makes Chinese exports more attractive, giving them a competitive advantage in international markets. Some experts argue.

However, a rapidly weakening currency may also cause investors to move their money out of China, warned analysts, even though they said Beijing could respond by imposing tighter capital controls ̵[ads1]1; or measures to limit foreign capital outflow.

JP Morgan's Chief China Economist Zhu Haibin cited a similar event in 2015, where the fear of a debilitating yuan hit the market feeling and led to large capital outflows.

The exchange rate would also hurt Chinese firms, as well as the country's pressure for greater use of the yuan internationally, according to Khoon Goh, head of research at Asia at ANZ Bank.

While a weaker yuan would offset the cost of higher rates, there are also disadvantages, Goh CNBC said on Thursday.

"Don't forget, there are also financial costs in a weaker renminbi," he said, referring to another name for the Chinese currency. "Many Chinese companies still have huge US dollar debt that is not secured. It will get them in trouble."

Ripple Effect

Other analysts have warned that a debilitating yuan may also harm other Asian economies

Arthur Lau, co-responsible for emerging markets in PineBridge Investments, said that a weakened yuan could beat regional currencies and lead to higher costs for those with dollar bonds.

"A weakening of the yuan may weigh on currencies in the region. Weaker local currencies mean higher debt service costs for US dollar bonds," he said in a note.

Lau added that some Chinese property developers, for example, had a "relatively large" percentage of foreign debt over other sectors.

Risk of Yuan Internationalization

Driving to the internationalization of the yuan can also be hit.

China has "made many steps to get the yuan included in the MSCI stock markets and this year the bond market was included in the Bloomberg Barclays index," said Goh from ANZ Bank.

He referred to Chinese A shares – those traded in mainland China – Join the index provider MSCI's global and regional indexes, A shares, as well as Chinese bonds in the Bloomberg Barclays index, are traded in the yuan

As Chinese assets are increasingly traded in global markets, more need foreigners to trade in the yuan, which is the purpose of internationalization run. But a weak yuan will also reduce the investor's confidence.

"So from their point of view, so that the yuan can weaken too much, the whole internationalization can be in danger," Goh.

Analysts estimate that complete inclusion in the Bloomberg Barclays index will attract about $ 150 billion of foreign influx to China's $ 13 billion the bond market, while the MSCI inclusion will also attract billions of inflows.

On Thursday afternoon in the Asia trade, the offshore yuan traded at around 6.92 to the dollar, while the onshore yuan was around 6.90 to the dollar.

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