Rise of the RMB

The redback retreats

Trump’s election victory is triggering a slide in the yuan

RMB-w

When Donald Trump hit the campaign trail hard last summer, he spent a few moments at one of his rallies refuting the notion that he wasn’t keen on the Chinese.

The property mogul was referring to a purchaser of one of his most expensive apartments, however, plus the country’s largest bank, which has an office in Trump Tower. “No, I love China”, he reflected, in a stump speech that suggested the opposite (for more on his views on China, see this issue).

Trump’s worldview is starting to come into sharper focus as he waits to take on the presidency and the impact is being felt in the currency markets, where the yuan has deepened its dive against the dollar.

Much of the decline is down to expectations that spending from Washington is going to increase, forcing the Federal Reserve to tighten monetary policy earlier than expected.

China’s economy has also been growing at a slower rate, and many analysts say the yuan will drop further until its fundamentals improve.

One of the alternative interpretations is that Beijing is exploiting the political paralysis that has followed Trump’s victory by driving the yuan down on the sly and pushing its decline against the dollar to more than 8% over the last year.

In this mould, the Securities Times is describing the dollar’s rise as a golden opportunity because “the market will think that the devaluation is caused by external factors rather than make accusations about a currency war”.

The inference is that the Chinese government is helping its exporters with a weaker renminbi and it’s true that the Chinese central bank has been lowering the daily reference rate around which the yuan is allowed to trade (for the 12th consecutive trading session on Monday), helping it fall to its lowest value against the greenback in eight years.

The problem with this claim is that China has spent more than $500 billion of its forex reserves trying to prevent the yuan from depreciating further over the last year.

Nor would it seem to make much sense to drive down the yuan so deliberately in the period immediately before Trump takes office, serving as a red rag to a bull. After all, the longer-term prospects for the exchange rate hinge on whether he follows through with his promises to levy 45% tariffs on China’s imports, and label the Chinese as currency manipulators.

So far, there has been little indication that he will deliver on his campaign diatribes and China’s newspapers doubt that he will go through with his promises.

“Trump as a shrewd businessman will not be so naïve,” an editorial in the Global Times argued this month. “None of the previous presidents were bold enough to launch an all-out trade war against China. They all opted for a cautious line since it’s most consistent with the overall interests of the US.”

If Trump does declare economic war, he will argue that the Chinese have more to lose because their exports to the United States made up about 40% of China’s total trade surplus last year. But both sides would suffer terribly in trade terms and the political atmosphere would turn poisonous. Flows of foreign investment into China would dwindle and the pressure to get capital out of the country would pick up. With the balance of payments deteriorating, China’s leaders might rethink their defence of the yuan, guiding it down more dramatically against the dollar or calling a halt to the sell-down of their foreign reserves.

The uncertainty surrounding Trump’s intentions is already making trading more volatile, says HSBC’s head of emerging markets forex research Paul Mackel, who is predicting that the markets will be hyper sensitive to any of Trump’s comments about China and its currency.

HSBC has also changed its forecasts since Trump’s triumph, predicting that the yuan will drop further against the dollar to Rmb6.90 by year-end, with a decline to 7.20 by the end of next year.


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