Beyond US shores, nowhere has Trump’s election as the next US President been more acutely felt as it has in Asia and on Asian currencies in particular. The reasoning is simple; Trump has talked tough on trade and of ‘on-shoring’. In simple terms, Asia has run a substantial trade surplus with the US. That’s led to a growing pile of dollars which Asia has invested back into the US. On one level, it’s a relationship that has served both well. US consumers have benefi ted from what Asia has produced, although some would say that has been at the cost of US jobs. This boils down to a debate on the cost-benefi t analysis of globalisation, something that many books have been written about. For its part, China has invested dollars back into the US via the US bond market. By having such a captive buyer, there is little debate that this kept yields lower than would have otherwise have been the case.
But how could this all pan out for the Chinese currency? Historically, USDCNY has been the most politically divisive exchange rate going. The US Treasury has been close to labelling China a ‘currency manipulator’ for many years, although more recently this has gone off the boil, with the latest report showing that China meets only one of their 3 criteria to be included on their ‘watch list’. So it’s somewhat ironic that Trump is upping the rhetoric when offi cial analysis is moving in the opposite direction.
Whilst China was building up a stockpile of FX reserves during the last decade, they have been falling over the past 2.5 years, down nearly 25% from their 2014 peak. So whilst the yuan has been weakening, it can’t really be said that China has been complicit in this move.
Indeed, over this period, the yuan has gained vs. most other Asian currencies and also major currencies, which has naturally put it at a competitive disadvantage in its main trading region.
So on China, Trump has missed the boat and the story has moved elsewhere. China is not the low cost manufacturing hub it once was and recent exchange rate moves have put it at a relative disadvantage.
China would benefit from a weaker exchange rate right now, as they struggle with capital fl ight out of the country. It would be dangerous for Trump to give them reason to pursue this because he’d be creating a rope by which to hang himself. Divorce isn’t an option for the US and China.