JHI on the Issues 2016: Is China Actively Devaluing Its Currency?

Candidate Statement: Early in the first presidential debate on September 26, 2016, Donald Trump reiterated a claim that he has uttered many times over the course of his campaign: “You look at what China’s doing to our country in terms of making our product. They’re devaluing their currency, and there’s nobody in our government to fight them. We have a very good fight. We have a winning fight. Because they are using our country as a piggy bank to rebuild China, and many other countries are doing the same thing.” Trump has also stated that within the first 100 days of his presidency, he would direct the Secretary of the Treasury to label China a currency manipulator.

Summary: While the Chinese currency appreciated strongly in the aftermath of the Global Financial Crisis, over the past 18 months that appreciation has almost completely reversed, with the Yuan now back to its weakest levels since the ’08 crisis.  Yet that trend line obscures a number of developments that might surprise Trump and supporters of his China-related economic policy.  Since 2014, the People’s Bank of China (PBoC) has indeed intervened repeatedly to affect the value of its currency, but almost invariably to strengthen the Yuan, not to weaken it.  More recently, however, the PBoC has relaxed the intensity of its interventions, allowing markets to push the value of the Yuan downward, a reflection of both U.S. dollar strength and worries over the increasing slowdown of the Chinese economy. Despite its enduring popularity as political red meat, the value of the Chinese currency has never had a historic correlation with U.S. joblessness.  U.S. job strength is not dictated by China’s currency regime, but rather by pro-growth U.S. government policies.

Talking Points:

  • Since 2014, China’s central bank has regularly intervened to keep the Yuan artificially strong. Beijing has actually pursued a goal that is in direct alignment with what Trump and many in Congress have called for: an appreciation of the Yuan.
  • If China wants to continue to move towards a more consumption-driven economy, as it has stated, it is in Beijing’s interest to keep the Yuan strong and not to devalue it to any substantial degree.
  • Since the third quarter of 2015, Beijing has allowed the Yuan to weaken against the Dollar, reversing what had been a substantial trade-weighted appreciation vis-à-vis the rest of the world. It is critical to note that China’s central bank has not been actively intervening to weaken the Yuan; it has simply opted to stay on the sidelines, let market forces push the Yuan down, and not intervene actively to strengthen it.
  • A myopic focus on the currency issue is misplaced and counter-productive to U.S. interests.  It distracts attention from the far more critical areas of dispute in the U.S.-China economic relationship, such as protecting intellectual property rights and expanding market access for U.S. companies.
  • For a proposed U.S. economic policy toward China, read JHI’s chapter on the subject in Choosing to Lead.

Questions the Press should be Asking:

  • What do you hope to realistically achieve by labeling China a currency manipulator?  (If China does indeed stop its manipulations at this point, the Yuan will immediately weaken—probably dramatically.)
  • Is your preference for Beijing to cease all currency interventions immediately, thereby letting the market dictate the value of the Yuan, even if that were to directly result in a substantial fall in its value?
  • How do you plan to deal with the potential fallout from the large number of American businesses with China operations that would likely be severely affected by a currency manipulation declaration?
  • If American jobs are not lost because of China’s currency regime, as most recent studies suggest, what kind of pro-growth economic relationship should be pursued vis-à-vis China, our largest trading partner?

Analysis: The fact that the Yuan has avoided a more substantial fall in value since 2014 is no accident.  It has been due almost entirely to regular interventions by China’s central bank to keep the currency artificially strong.  Beijing’s goal here is currently in direct alignment with what Trump and so many others in Congress on both sides of the aisle have purportedly been clamoring for all along: Chinese policies that strengthen, or appreciate, the Yuan.

If China wishes to continue to move towards a more consumption-driven economy, as it has long pledged, it is in Beijing’s own best interest to keep the Yuan relatively strong, and certainly not to devalue to any substantial degree.  A stronger Yuan means more purchasing power in the pockets of Chinese households, a major propellant for encouraging stronger consumption, both domestically and abroad.

Since the third quarter of 2015, Beijing has allowed the Yuan to weaken against the Dollar, reversing what had previously been substantial trade-weighted appreciation vis-à-vis the rest of the world.  However, the PBoC has not been intervening to weaken the Yuan; it has simply opted to stay on the sidelines and not intervene actively to strengthen it.

China is a major trading partner of the United States and as such the two economies are closely interlinked.  China does have a history of mercantile trade policies and like many U.S. trade partners has a history of gaming its currency for competitive advantage.

That being said, part of the justification for TPP is to reign in China’s growing influence with its Asian trading partners.  TPP, in fact, has one of the toughest currency manipulation provisions of any multilateral trade agreement and would make it more difficult for China to ultimately join the trade bloc without substantial reform of its economy and monetary policy.  TPP is focused on establishing sound ground rules for trade in the fastest growing region of the world.  Preventing China from establishing the rules of trade in the region would do far more good for the U.S. economy than labeling China a manipulator, particularly since any such “manipulations” over the past two years have largely been in alignment with U.S. interests.