Macroscope | Be careful what you wish for Mr President, a stumble in relations could send China’s currency for a tumble
The incoming administration in Washington should recognise that Beijing has spent US$800 billion defending its currency in recent times
It’s probably fair to say that a further and material fall in the value of the Chinese yuan is not top of US President-elect Donald Trump’s wish list for 2017, but there’s a very real risk that could happen if China-US relations deteriorate, especially at a time when the Federal Reserve seems on the cusp of raising US rates again.
As analysts at Japan’s Nomura Bank wrote on December 7, “China is already facing large net capital outflows under the current [Foreign Exchange] regime where it has been allowing for some FX flexibility and intervening sporadically in the FX market”. And that’s while President Barack Obama is still occupying the White House.
In the event of a marked downturn in China-US relations, that might well translate into even greater net capital outflows that would test the ingenuity and indeed the willingness of China’s authorities to control the pace of a weakening of the yuan.
With that in mind, it may strike many observers as ironic that while Trump has regularly characterised China as a currency manipulator, the only “manipulation” that Beijing could be accused of in recent times is of slowing the pace at which the yuan weakens.
Beijing might have expected Washington to appreciate China’s efforts to achieve this.