By JC Collins
When Donald Trump labels China as a currency manipulator there is more to that broad accusation which should be considered. The obvious truth to economists and those who seriously study such matters is that China has been working hard to prevent the renminbi from depreciating as opposed to implementing monetary policies which directly encourage or force renminbi devaluation.
Though China would strategically like to retain a level of competitiveness in its exporting, its gradual transition to a consumption based economy is proceeding and a weaken renminbi is working against that objective.
The increasing strength of the dollar has put greater downward pressure on the renminbi from which China has attempted to keep the yuan-dollar exchange rate stable, which has forced them to dip into their foreign exchange reserves by approximately $1 trillion.
The so-called China “dumping dollars” attention grabbing headlines is a gross mischaracterization of the monetary and economic fundamentals which are driving these adjustments.
The strength of the USD is pushing down the valuations of the currencies of all nations, especially those of emerging countries. Either Trump is operating in complete ignorance to this fundamental truth or he has a larger strategy which he is attempting to implement. Based on some of the talent he has surround himself with it is my conclusion that he understands this truth but is attempting something else.
The “America First” mandate promoted by Trump would make it difficult to turnaround and blame the USD for the ills of the international monetary system. Trump and some of his cabinet picks have expressed their opinion that the USD is overvalued and needs to be devaluated to make America more competitive. But they fall short of blaming the USD for the downward pressure it is placing on the renminbi.
So a strong US dollar is not good for America, nor is it for China and other nations, but the downward depreciation pressure it creates on the renminbi is blamed on Beijing as currency manipulation while China is in fact working hard to appreciate the RMB to maintain the expansion of domestic consumption.
China’s international investments are just under 60% of its GDP. In contrast America’s international investments equal 130% of its GDP. Broadening these international investments, which it has been attempting to do, will help stabilize the value of the renminbi.
Further reforms of the Chinese financial system will facilitate this growth in international investments. Labeling China a currency manipulator for keeping the value of the RMB low is a direct contradiction to the fact that China is actually attempting to keep the value up in face of a strengthening dollar.
Trump could be forcing China into a corner where they have to widen the trading ban with the USD and push financial reform mandates even faster and further, which is something the patient and careful Chinese have been reluctant to do. Perhaps American and western interests want more access to Chinese markets before they allow the USD to weaken against the RMB. Increasing Chinese international investments would open up their domestic markets for wider investment as well.
The balance between both currencies is where the international action will take place. These first negotiations between Trump and China should be extremely interesting. What I wouldn’t do to sit in a chair at the back of the room and listen to the exchanges. – JC