‘Dual circulation’ and US-China decoupling are two reasons to strengthen the yuan

The times they are a-changin’ – as the Bob Dylan song goes. The foreign exchange market would do well to heed that lyric. Beijing is moving towards a “dual circulation” economic model, while in Washington, President Donald Trump is talking again about decoupling the US economy from China.

The renminbi should strengthen. President Xi Jinping’s vision for the Chinese economy relies more on “internal circulation”, encompassing domestic production, distribution and consumption. This more self-sustaining approach is to be complemented by China’s continuing exporting prowess, the “external” component of the “dual circulation” strategy.

On its own, “dual circulation” could have major implications for the currency market, and that is before any attempt to factor in Washington’s intentions to reset the US-China relationship. It would appear that Washington wishes to make the US economy less reliant on China and to bring back the manufacturing jobs now seen as having been lost to China in recent decades.

With China’s trade surplus with the United States having surged by 27 per cent year-on-year in August, according to the Post’s calculations, clearly Washington still has quite a way to go before achieving its goal. But that doesn’t mean some degree of decoupling won’t happen, regardless of who wins the White House in November.