Trump's Futile Quest For A Renminbi Plaza Accord

Recent US media reports claim China may depreciate its renminbi to cope with shrinking exports. Yet, economic realities are precisely the reverse. Worse, trade wars are about to hit American consumers.

Recently, the White House lifted tariffs to 25% from 10% on $200 billion of Chinese goods, while targeting another $300 billion worth of Chinese imports for potential punitive tariffs.

As was to be expected, the renminbi depreciated from 6.7 to more than 6.9 against the US dollar, mainly on renewed trade tensions.

China retaliated by imposing duties on $60 billion of US goods, starting June 1. China could have retaliated hard, but opted for a mild response that highlights the importance of talks.

“I love the position we’re in,” President Trump said recently. Yet, the movement of the renminbi may not be to the liking of the White House since it is likely to offset the tariff impact.

 

Trump tariffs' impact on Chinese and Asian currencies

Until Trump's tariff escalation, Chinese renminbi was around 6.80 against the US dollar. That, however, was predicated on the expectation that cooler heads would prevail in the White House and a broad-scale trade war was avoidable. When President Trump opted for tariff escalation, markets reacted quite expectedly. For now, the Chinese currency has only reversed its appreciation year-to-date.

As Trump prepares to raise and broaden US tariffs even more, Chinese renminbi could depreciate more. But that is the White House’s choice, not Beijing’s preference. Indeed, Trump’s tariffs have paced the renminbi fluctuations ever since the start of his trade wars (see Figure).

Figure                        How Trump tariffs reverberate in renminbi movements

 

In light of these facts, the claim that China is depreciating the renminbi is simply flawed. Depreciation is precisely what China seeks to avoid. When exports shrink, a light depreciation of the currency is of no help. And if the renminbi would depreciate significantly in a short period of time, it would foster worries about capital flight.

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Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute ...

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