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.

CHINA STEPS UP INVESTMENT IN AFRICA

Four hundred years ago, more or less, Isaac Newton told us that for every action there is an equal and opposite reaction. The notion of homeostasis applies a similar idea in a different way, suggesting that change in one area of a system dictates change in another. And so we find one of the great axioms of life. Whenever one thing wanes, another waxes. One lessens, the other increases.

As the United States withdraws from engagement with the world others, most notably China, have stepped in to fill the void. Trains, power plants, investment in agricultural production. Providing financing, technical support, and operational assistance. We back away, they step up. Our influence wanes, theirs waxes.

See below, Andrew Jacobs, "Joyous Africans Take to the Rails, With China's Help," The New York Times, February 7, 2017

China's Monetary Role Portends Global Shift

In recent weeks, China has sent not-so-subtle messages to the U. S. and to the world. First they warned the United States against devaluing the dollar, a move that would devalue the hundreds of billions of dollars in U. S. debt currently held by China. Then, they suggested the world should adopt a reserve currency not based on the economy of any single country – calling for a shift away from the world’s dependence on the dollar as that reserve. China’s rumblings about the dollar might be seen as an attempt to stake out their role as a critical economic player prior to the G20 meetings. And they might have been an attempt to test the mettle of the United States’ new and young president. Whatever the immediate aim, the suggestion of a larger and more permanent role in world financial affairs goes far beyond China’s concerns over the current economic crisis.

For the past fifty years, China has been growing toward a market-oriented economy. Using low wages to its advantage, China has transformed itself into the world’s manufacturing center. From its huge export trade, China has amassed foreign exchange reserves in excess of $1.5 trillion. At the same time, it has carefully developed its own domestic economy, raising growth of domestic demand to 4-6% per year. As a result, China and the United States are reversing their historic fiscal and monetary roles. At the close of World War II, the U.S. loaned money to other nations to enable them to purchase American goods. Today, China loans money to the U.S. to enable the U.S. to purchase Chinese goods.

As this century unfolds, the symbiotic relationship between China and the United States will profoundly influence U.S. foreign policy. With loyalties re-forming along commercial lines, the United States will come to view its relationship to all other countries through a China/trade-and-commerce prism. As the U.S. orientation turns increasingly toward Asia, a power and influence vacuum will develop in other parts of the world. The U.S. will become increasingly reticent to participate in solving Middle Eastern and European problems. Countries in other regions will move to fill the gap left by the U.S. absence, realigning along trade and commercial interests.

What you hear now in China’s warnings about U. S. fiscal policy and its call for an independent international reserve currency are but the first rumblings of a coming global realignment of nations.