Trump and the yuan

February 22, 2017, by Hubert Fromlet, Kalmar

Trump does not like China’s exchange rate policy. Furthermore, he criticizes Germany for using the “grossly undervalued “euro to undermine the export interests of the United States. Trump really thinks that the euro is a kind of implicit German mark. This latter conclusion is wrong, too. Germany alone would certainly prefer higher interest rates these days and, thus, also accept a probably stronger currency within the eurosystem. By the way, the euro was not a German invention but was created after a strong French initiative.

I don’t know what led Trump to the findings mentioned above more than his deeply anchored protectionism. Sure, the Chinese currency has been weakening on trend since early 2014. However, does this really reflect an ongoing severe manipulation of the yuan (also called renminbi , RMB)? China has indeed a managed floating exchange rate system – although I would even say a strongly managed exchange rate system. We also know that Chinese (provincial) leaders are deeply concerned about declining international competitiveness in a number of areas and about insufficient foreign market growth. This makes it logical that the Chinese currently are not working ambitiously for a stronger currency. But is China really dumping its currency? In my view it is rather the case that appreciation expectations of financial markets have gone (somewhat) too far in the past few years.

May be Chinese political leaders like their own current situation and see it also as a kind of fair currency equilibrium for some time in the future. Looking at China’s structural challenges, a steadily ongoing appreciation of the currency would not be quite logical anymore due to all the structural problems. Other countries with floating FX-rate policy are targeting or willingly influencing there exchange rates as well, at least from time to time. Japan may be mentioned in the first place – but Sweden’s central bank is currently also acting in favor of a relatively weak exchange rate.

Furthermore, the Trump administration has still not realized or accepted that China more recently announced that it is concentrating FX policy on a relatively stable RMB vis-à-vis its total currency basket rather than on the U.S.dollar alone. China has more lately been turning away from the buck to some (limited) extent. This is not unfair. China is an independent country that is free in its exchange rate policy as long as it does not violate or jeopardize global stability very visibly – but this is right now obviously not the case.

America is not always first on forex markets though the floating U.S. dollar remains the most important currency on global markets. Trump can only have a major and sustained impact on global FX markets – China included – if markets can relate him to really bad or good policy decisions or announcements. But he cannot just say how Beijing or Frankfurt should behave for improving his “America-First Policy” on global currency markets.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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