Tuesday, August 06, 2019

Chinese Yuan and the Trade War

Every evening, the People's Bank of China sets the exchange rate for the Yuan against the US Dollar. Has anyone in the current US administration considered the rate set for this past Monday (8-5-19) was actually a warning of what China could do to US markets, simply by adjusting the rate to weaken the Yuan?

Devaluing a currency has a net effect on consumption similar to that of tariffs - it lowers the cost of the host country's products, while raising the price of imported goods. However, devaluing one's currency has a broader impact than merely targeting specific products with tariffs and produces collateral economic damage of a far-reaching nature, which is what we saw when the Dow Jones average dropped as much as 950 points on Monday.

Historically, Chinese officials have conveyed policy decisions through implication and innuendo. Rather like Michael Corleone in The Godfather Part II noting a dramatic shift of intention by a subtle shift in language. Perhaps Monday's valuation of the Yuan was just such a message.