Every country manipulates its currency. At times it's done via changing one's interest rate. At other times it's done via buying or selling other countries' currencies, as Switzerland did in the summer of 2015.
Tariffs and currency manipulation work the same way. Tariffs are more efficient. They can be installed and removed precisely and immediately. Because of this, tariffs have been used effectively for hundreds of years. Why the sudden unpopularity during the past few decades? Bring them back. Gain control again.
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Currency is one of the unintended consequences of trade wars well known to economists but not to politicians who think in 2 dimensions.
The Obama Administration knew it. But the Trump-Navarro duo? Not so much. The Republican old guards may know about it too - too bad that they have been reduced to a bunch of spineless wimps. The rest of Trump's are just a bunch of parasites. And that, my friends, is a perfect storm of global proportion
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This info may help in gaining a better understanding of this topic. Start with US exports to China and how a stronger dollar affects these US exports. Consider:
First: I export $2 worth of US goods to China; when the exchange rate is $2 = 2 Ren. So, these $2 in US goods ship to China at a price (P) of: [$2 x (2 Ren/$2) = 2 Ren]. Next, the dollar strengthens, so $1 will now buy 2 Ren; or $1 = 2 Ren. Now these $2 in US goods' P is 4 Ren in China, per: [$2 x (2 Ren/$1) = 4 Ren]. So, with a stronger dollar, the P of US exports to China increases.
Also, with a stronger dollar, Chinese imports into the US come at a cheaper P. First: 2 Ren = $2; and the P of the 2 Ren in Chinese imports into the US is $2. Next, the dollar strengthens to 2 Ren = $1. So, these Chinese imports' P in the US is now $1, per: [2 Ren x ($1/2 Ren) = $1], so their P declines. With a stronger dollar, US exports to China increase in P while Chinese imports into the US decline in P.
A weaker dollar produces the opposite effects on the P of US exports and Chinese imports. First: the initial rate is: $2 = 2 Ren, so $2 in US exports sells for 2 Ren in China. The dollar weakens to $2 = 1 Ren, so the goods' P is 1 Ren, per: [$2 x (1 Ren/$2) = 1 Ren], a lower P. But, Chinese imports into the US increase in P, per: 2 Ren = $2; the 2 Ren in Chinese imports' P is $2, and with a weaker dollar, 1 Ren now equals $2, so the imports increase in P to $4, per: [2 Ren x ($2/1 Ren) = $4].
10/31/18 W 11:30a Greenville NC
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Currency games are nothing new - remember that legendary exchange between Charles de Gaulle and John F Kennedy?
de Gaulle: 'Down your dollar!'
JFK: 'Up Your Franc!'
Civilized times...
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This is not good journalism.
This is an article primarily analyzing whether or not China is manipulating its currency, when all of the policy actions driving change -- tax cuts, rising Fed rates, tariffs -- are US actions. Because of these US policies, the US dollar is rising against almost all global currencies, including the Chinese Renminbi.
Not to mention that the key metric that is demonized as bad -- the US trade deficit -- is driven by consumption choices of 330 million US people and millions of US businesses. If a country consumes more than it produces, it will have a trade deficit -- and those are American choices. The US can choose to play whack-a-mole with tariffs, and possibly have the deficit with one country decrease while another increases, but the total trade deficit is driven by US choices and US policy.
The reason why I say this is not good journalism is because spouting this fact-free nonsense keeps readers in the dark while supporting the politics of division.
As a foreigner, I wished y'all would stop whining about your own choices, stop blaming others, and deal with reality.
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The problem is not the Chinese government who wants to depreciate the currency. The problem is that the American companies especially the Wall Street big firms to bet on RMB depreciation. With strong dollars and weaker RMB, it helps the American companies to buy more Chinese goods with fewer dollars. Companies make bigger profits propelling higher stock prices. Wall Street firms are global and powerful. Just look at their Hong Kong branch offices employed thousands of professionals monitoring and trading China & Hong Kong stocks and bonds very second of the day. It is not up to the Chinese government, but our Wall Street titans.
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How do the worlds currency traders play into this? How do they take advantage of this to profit?
@Allen Polk Currency traders play less of a role in the value of the renminbi than they do in the value of major currencies like the dollar or the euro. There are a couple reasons for this.
One is that the main currency trading, here in Shanghai, is tightly controlled by the government. There are high legal and regulatory obstacles to foreign speculators.
Renminbi trading in Hong Kong, a semi-autonomous Chinese territory with a separate legal and economic system, is much more open to international currency traders. But the Chinese government and Beijing-controlled banks have learned how to keep a tight grip on speculators in Hong Kong as well. They have done so at least in part by keeping interest rates higher for borrowing renminbi in Hong Kong than on the mainland. They have sometimes arranged very steep upward spikes in short-term interest rates in Hong Kong, making it extremely costly for speculators to keep their positions.
The main force pushing down the renminbi these days lies in the desire of millions of Chinese citizens and companies to limit their exposure to the renminbi. China has achieved a remarkable leap in prosperity over the past four decades. Chinese families and companies typically have almost all of their assets inside the country, particularly in real estate. When the Chinese economy slows and the stock market falls heavily, as we have seen lately, they start looking for ways to put at least some of their savings elsewhere.
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The problem of the USD vs the RMB, EUR or other currencies is that the value of the USD is not really controlled by the actions of the US but other factors.
As others have pointed out the USD is hugely overvalued towards other currencies and needs to be corrected anyway.
The strength of the USD is based on the fact that it is the currency of choice for most trade on this planet.
So quite a large part of control over the value of the USD does not lie with the FED, the US government or the US economy but with world trade.
Unlike China and even Europe, the US cannot directly influence its own currency easily which makes it harder for the US to counter measures by e.g. the PBOC.
Which only goes to show that Trump's "Economic wars are easy to win" attitude will only harm the US in the long run.
The world out there is way too complicated to be understood by someone who does not even have a degree in economics, let alone controlled.
Trump will learn that in fact what he perceives a strong USD will easily kill his ambitions of economic world domination.
And that even a weaker USD will not help him as the US has lost most of it's production facilities to countries that already have found their place as being the US's work bench due to the currency politics of their own leaders.
Getting out of a working system will usually harm those that are getting out.
And this is what happens with the US and the UK.
The RMB exchange rate is but a small part of this play.
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China may devalue to show Trump the world is complex, but a related and seldom discussed issue is that the dollar is over valued and it is time for its value to fall. Robert E. Scott of the Economic Policy Institute argues that the dollar is overvalued by at least 25 to 30 percent against the yuan but also the yen and the euro. Devaluation would drive Trump’s jobs, jobs goal better than his tariff increases until reactions occur. Scott is not the first economist to see dollar overvaluation.
See: https://www.nytimes.com/2018/10/23/opinion/trump-unfair-trade-china.html
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@wsmrer There is a case to be made that the dollar is overvalued when looked at strictly in terms of trade in goods and services. Economic theory also suggests that in the long term, broadly measured trade balances should dictate a currency's value.
The difficulty is that investment flows among countries can and often do play a bigger role in the short-term and medium-term strength or weakness of currencies than trade in goods and services. A country like the United States that consistently runs large trade deficits can still end up with a strong currency if everyone wants to invest there.
Right now, the investment flows out of China seem to be having a greater effect than trade on the value of the renminbi against the dollar.
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@Keith Bradsher
Exactly. It's capital flows that are the main driver. It's also highly questionable whether the dollar is over valued to any great extent right now. There's also the philosophical issue of whether a strong dollar is a good thing.
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China values her currency against a reference basket of the weighted average of the values of her principal trading partners–not the dollar.
She does this to demonstrate that, hey!, currency baskets confer much greater stability than even the dollar.
Next step: convince other central banks to follow suit and use Keynes' Bancor, a currency basket, as reserves instead of, yep, the $US.
Four American Nobel economists have publicly supported the PBOC's announced intention to do this and the IMF has already issued it first currency basket loans, which it calls Special Drawing Rights.
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I have not seen any of the doomsday pricing or shortage situation predicted by the whinyest of peopel afraid of the big bad bogeyman (China).
We can show that we have the resolve to get a fair deal or we canroll over and hope the Chinese are merciful. In case these intelligentia have not noticed, China has extended its influence around the world due in part to our follow from behind policies. It will take time to assert the power of American capitalism globally after years of political correctness.
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China is a mature economy with robust equity and debt and currency markets, and government mechanisms not unlike those the USA employed in the GFC to support those markets. Most important points to make in reference to your article are the following:
True that Chinese currency at 7 is 14.3% cheaper than at 6, it is also true that a weakening currency encumbers Chinese corporations from capital raising and currency hedging markets, mostly via psychological effect since their capital is mostly held onshore. Given China's trade is less biased toward net exports than 10 years ago and capital structure is far more leveraged than 10 years ago, a weakening currency would have significant adverse consequences that far outweigh the benefits of a cheaper currency.
China of 10 years ago needed FX reserves. The size and growth of FX reserves since China entered the WTO mathematically parallel their monetary base. As a mature economy, they largely need less or no FX reserves, much in the same way the USA needs no FX reserves. They are better off spending their trade and other receipts internally to support their population and economic growth, and capital markets were they stressed by a financial crisis. Those expenditures would be in Chinese currency. Thus, China has far less need for FX reserves, and that need is declining steadily. Relinquishing their FX reserves would imperil their foreign bond holdings asset price, which explicitly fund their foreign customer's purchases.
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@Steve I would agree with your first point. China's economy is less dependent on exports than it was a decade ago -- although China's economy is even now still much more dependent on exports than the U.S. economy.
A sharp fall in the renminbi could create all kinds of financial problems in China. It could trigger another rush of money out of China like the one we saw in late 2015 and early 2016. That could damage financial confidence, and cause a further decline in the stock market and possibly in real estate prices. At the same time, the benefits of a weaker currency to China's exports might be more muted.
But your point about foreign exchange reserves may draw more disagreement among economists. If a sharp fall in the renminbi is a danger to the economy, then China may well want to hold large reserves of foreign exchange, and sometimes spend them, in order to prevent this from happening.
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Why in the world didn't Congress curb Trump from issuing tariffs I will never understand. When it is fully implemented the end result will not be job returning to our shores, but it will be prices increasing and business profits going down. What Trump wants to do is curb Americans purchasing products from China. Would someone remind Trump that it is consumer purchases that fuel this economy. While you are at it, remind the self-appointed genius POTUS Trump that he does not change the U.S. Constitution by taking a Sharpie and signing an executive order. Pitiful.
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When has the Chinese economy ever worked in a vacuum? Failure of the Chinese economy would push the wealthiest 5% of Chinese to protect their money in a stable environment, just like last time. If even half of those folks decide to hide assets in American stocks, cash, and real estate, that's 34 million people jumping into those markets and driving asset prices, and the dollar value, sky high. Remember when real estate was affordable? Like it or not, China has a place at the American dinner table and they're hungry.
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China's response to the last foreign exchange rush when the yuan approached 7 was to install currency control mechanism and that effect lives on. Moving current abroad is a transparent process even if done with cargo carriers loaded with bundles of 100 yuan notes. Exchange rate provoke desires, realizations another matter.
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For decades, China has built a powerhouse economy with the assistance of American governments. Trillions of dollars of Chinese manufactured goods have been purchased by Americans. In the process, American manufacturing jobs have moved to China. Mr Trump was elected to bring those jobs back to American workers, and the widening of the 10% tariffs is the next step in that process.
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@Harold, I do hope you'll give us an update when American made dishwashers, computers, and TV's start shipping from New Orleans to due Trump's tariffs.
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@Harold, that’s not quite the picture. It’s the US consumer that’s been feeding the Chinese economic engine— everything you buy in Walmart and Target that’s attractively priced comes from China and elsewhere in Asia. These prices are now what people expect. The tariffs haven’t begun to move jobs back here. Instead, the work is moving to Soueast Asia. US labor still isn’t cheap enough. Would you want a $15/day job? Or a t-shirt that costs $50?
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@Haroldlost
Curious you hold the government at fault for lost jobs, more accurate to blame CEO’s and stockholders delighted to see profits soar as labor cost disappear. But you are right a functioning government could have reacted with positive programs to put our people back to work by retraining and mobility assistance, still needed but beyond Republican comprehension perhaps.
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This is far too complex a situation for Trump to grasp and handle intelligently.
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The fact that there are so few comments here reinforces to me the economy is not the reason d trump was elected president.
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"Trade wars are easy to win."
SO MUCH WINNING.
We're about to see on 11/6.
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Underlying renminbi valuation is trump's neurotic desire to cripple the Chinese economy. Trump, the unthinking president, is no leader for these times, especially with his childish isolationism.
And if the renminbi strengthens, once again the U.S. consumer pays to keep his or her president in office. We are adjusting interest rates here to deal with inflation, an action that trump has vilified along with other rational acts. So as prices rise, the Fed will counter, barring trumpist fascism. At some point the economy will retract.
We'll see if the Chinese can avoid any instability.
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Given China's 'Century of Shame' (Forced Foreign Trade Concessions), it would be political suicide for Xi to be seen as buckling under Trump's tariffs. Nor would a Chinese economic collapse be in US interest (if that matters to Trump). Trade issues such as IP, Tech Transfer, Access, etc. would be much better managed via negotiation (leveraging reciprocal access) especially in alliance with EU and Japan.
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If anything the Chinese government is keeping the renminbi artificially high by preventing it’s citizens from moving it out of the country.
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@James Crandall
Wrong the devalued RMB increases the desire to exchange yuan for dollar or euro, increasing the government concern of foreign exchange flow. Learning from the last rush of FX controls has developed to monitor than flow.
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