Supposedly China is in big economic trouble, its growth is slowing, its prosperity is a bubble, and it is getting hammered in the trade war.
Naturally if true all of these are going to exert considerable downward pressure on its currency. So then why when the yuan slides to the dollar only 5 percent from where it was three months ago that is evidence of Beijing artificially devaluing its currency from where the market would set it?
In fact looking at the Trump era as a whole, the yuan is down a meager 2.5 percent, from 6.85 to 7.05:
Sure the yuan exchange rate is technically controlled, but even a government committed to a partial peg — if it feels it is bleeding too much foreign currency on the exchanges — has to either institute trade-destroying capital controls or let the currency slide.
The current yuan drop is driven by market forces reflecting China’s slowdown in the growth of the economy as China begins to pay the price for the misallocation of capital that was the result of misguided post-2008 Keynesian stimuluses and credit bombs.
That yuan is falling relative to the dollar does not mean however that Chinese economic woes are advancing quicker than American ones.
What it means is that the market bombarded by Federal Reserve low-interest and QE scams has not yet woken up to the much bigger bubbles in the US, but is instead closely scrutinizing the fundamentally sounder China while keeping blind faith in the US.
Actually that is a good thing for China as it will help to keep it honest and safeguard from prolonged mass delusions.
On a final note, Trump claims Americans are not bearing the price of his tariffs on Chinese goods because Beijing offset the higher prices to American consumers by artificially devaluing its currency. However how exactly does a 2.5 percent devaluation offsets a 25 percent tax hike?
The idea China would devalue the yuan to take on the burden of paying for Trump’s tariffs is absurd. US imports represent just 20 percent of China’s total exports. So even if China for some misguided reason wanted to pay for the tariffs, it wouldn’t go about it in a way that put a discount on all of its exports, including to 3rd countries.
China is literally better off forsaking exports to the US and losing just 20 percent of the export earnings, than ever putting a 25 percent discount on its total exports.