- REUTERS/Jonathan Ernst
- Trump called China a “currency manipulator” after letting the renminbi slide, sending markets into meltdown Monday.
- In reality, this isn’t the case. China simply let the renminbi depreciate, so in fact did nothing.
- On Trump’s definition, the US has a long history of “currency manipulation.” The US dollar has lost 96% of its value over the years.
- View Markets Insider for more stories.
Trump late on Monday called China a “currency manipulator”. In reality, that’s not the case. China actually did the opposite – hitting back at Trump by doing nothing.
Last week Trump tweeted that the US would raise tariffs on China by an additional 10%, which only exacerbated the already tense situation between the two superpowers. On Monday, China let the yuan fall, which in turn sent markets into their worst day of 2019.
This isn’t the first time Trump has called an economic power a currency manipulator. In July he did the same, hitting out at Europe and China, due to his frustrations with the strength of the dollar.
“China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA,” Trump wrote on Twitter.
At the time, Trump wanted to play the same game he was accusing the European Central Bank and People’s Bank of China of. “We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”
Trade policy and currency are inextricably linked, and China letting its currency fall really wasn’t unexpected. Currencies behave the way stocks do – their relative prices are affected by supply and demand. Generally, a strong economy will generate a “strong” currency, one that increases in value. Negative economic news will cause people to pull their money from that economy, lowering the currency’s price. Traditionally, countries that “manipulate” their currencies are artificially boosting or lowering the strength of their currencies by buying or sell vast quantities of it via their central banks. So it is not a surprise that the renminbi might slide as the US puts tariffs on its international goods.
“Currency is just the other side of the trade coin. You cannot have trade policy without currency policy being intertwined so no surprise that we have come to this,” said Neil Wilson, chief market analyst for Markets.com, to Markets Insider in an email.
Beijing had been defending the yuan – by using its foreign currency reserves to buy the currency – keeping it above that “7-per-dollar threshold” but as Wilson says, the last straw was the added 10% tariff Trump announced last week. Once the tweet hit, China said it would retaliate. No one was sure how, but on Monday the currency began to slip.
“They [China] had nothing to lose in letting it go,” said Wilson.
Counter-attacking means “doing nothing,” as Pantheon Macroeconomics analyst Freya Beamish noted.
“We’ve always said that China’s first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate. Well, it’s happening; the RMB has dropped precipitously since late last week, smashing through the seven-to-the-dollar mark,” Beamish told clients.
She added: “If Mr. Trump wants to play hardball, which it would appear he does, then China has little option but to hit back.”
This is hypocrisy. Trump had been badgering the US Federal Reserve to lower interest rates all the way into last week’s cut. The pressure was like a throwback to the 1970s, when former US President Richard Nixon pressured Fed chair Arthur Burns to keep interest low even though inflation hit 12%. Since then, politicians have largely avoided involving themselves directly with central bank decisions.
The rate cut didn’t quite work out for Trump. The dollar went up in value despite the cut. (Currencies move in comparison to other currencies, in addition to being influenced by their central banks.) China, through The People’s Daily, accused the US of “deliberately destroying the world order.“
“There can be no doubt that China does manage its currency as the yuan does not float freely on international markets. But America is in no position to pretend that it does not either,” said Russ Mould, investment director at AJ Bell, in an email to MI.
In fact, the US has a long history of letting its own currency slide:
“According to the Federal Reserve’s own data the US dollar has lost around 96% of its purchasing power since the central bank’s creation in 1913 and it has lost 85% since President Richard M. Nixon took America off the gold standard in 1971, so the US could fund Vietnam and welfare programmes,” Mould said.