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.
While Trump is correct that the Obama administration’s policy of “strategic patience” has yielded few results (North Korea has qualitatively and quantitatively improved its nuclear weapons capabilities), his policy recommendation is both flawed and dangerous. The idea that China can “solve” North Korea has been around for years. Yet North Korea remains strategically too valuable to Beijing, and it is not certain how much leverage China actually has over Kim Jong-un, who is clearly determined to lock in North Korea’s nuclear status. Moreover, Trump’s proposal would surrender our ability to shape Northeast Asia’s geopolitical environment and would discourage South Korea and Japan, leading to a weakened relationship with both. Still, the U.S. should encourage China to remain involved alongside the U.S., South Korea, Japan, and others in the region to deter North Korean provocations.
This backgrounder explores increasing tension with China in the South China Sea, including the country's reaction to a U.S. led "freedom of navigation" operation, the ongoing arbitral dispute with the Philippines over territorial claims in the South China Sea, and China's continued military build-up there.