Pro Perspectives 11/8/19

November 8, 2019

As the prospects of inking a limited trade deal have risen, so has the yuan.

The PBOC has walked UP the value of its currency over the past month.

Remember, on October 11th, Trump said we have a deal, which includes an agreement on “currency issues.”  That means, a stronger yuan, weaker dollar.

That’s what China has manufactured, thus far.  Here’s a look at that chart since …

In the chart above, the falling line represents a strengthening yuan versus the U.S. dollar, and vice versa. 

The next chart gives some bigger picture on what the Chinese have done with their currency, in response to Trump and economic weakness.  Let’s step through it (as we have in the past), and then talk about what it means for the discussion on a rollback of tariffs.

1) They slowly allowed the currency to climb (against the dollar) following threats of a big tariff on China from Graham and Schumer (yes, Schumer) back in 2005.
2) When the global economic crisis hit, they went back to a peg to protect their ability to export. 
3) They went back to a slow crawl higher as tensions rose, and people began to believe the developed market economies might be passing the torch to China for economic leadership. 
4) It became clear that China can’t grow fast enough in a world where developed market economies are struggling. So, they went back to weakening the currency to protect their ability to export. 
5) They strengthened the yuan when Trump was elected to try to ward off a trade war.
6) Trump wasn’t placated and tariffs were launched. They weakened the currency with the idea that a threat of a big one-off devaluation in the currency might create some leverage.
7)  After trying to hold-out, it seemed clear earlier this year that they needed to get a deal done, as the economy continued to sink.  They walked the currency higher again – a signal that they are willing to make aggressive concessions to get a deal done. 

8) But Trump escalated the trade war with bigger tariffs, and the Chinese made one of the largest devaluations in the yuan in years (a warning shot).

9) And now, we have what looks like the Chinese executing on a currency agreement (in principle).

With all of this said, what you’ll notice from the chart, is that a Chinese agreement to a 15% REvaluation of the yuan will only take us back to the levels of 2018, levels at which China had already conceded in efforts to keep Trump’s tariffs at bay.  It didn’t work.  Trump fired off tariffs anyway.  And China simply offset the tariffs by moving the exchange rate.

With the debate over whether or not a deal will come with a rollback of tariffs, it seems clear that an agreement on currency can/will only come if tariffs are rolled back.