In the chart above, the falling line represents a strengthening yuan versus the U.S. dollar.
China’s currency manipulation (i.e. weak currency policy) is at the core of the global trade imbalances that precipitated the global financial crisis. With that, the currency is a key piece of the trade and structural reform demands from the Trump administration.
You can see how China has been maneuvering to pacify currency tensions over time:
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 has become clear that they need to get a deal done, as the economy continues to sink. They’ve been walking the currency higher again – a signal, along with stocks, that they are willing to make aggressive concessions to get a deal done.
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