Yuan Falls below 7: Prelude to a Currency War?

Published in UDN
(Taiwan) on 10 August 2019
by (link to originallink to original)
Translated from by Jennifer Sampson. Edited by Elizabeth Cosgriff.
On Aug. 5, the value of the yuan finally fell below 7 yuan per U.S. dollar, and that evening, U.S. stocks fell 3%. The U.S. Treasury Department struck while the iron was hot, announcing on Aug. 5 that China was a currency manipulator. This heightened the risk that the U.S.-China trade war would expand into a global currency war and added pressure on global economic and financial markets.

Now that the yuan has broken below the seven threshold, will it stay there or is it temporary? Can it bounce back? Or will it keep falling? After the yuan fell below seven, the People’s Bank of China lowered prices and U.S. and international stock markets rose, which indicates that Chinese authorities currently are inclined toward a temporary depreciation. They are giving Donald Trump a glimpse of the many retaliatory tools China has should the U.S. impose an additional 10% tariff on $300 billion worth of Chinese goods. Moreover, the yuan exchange rate can be lowered with one word, and the importation of U.S. agricultural products can be stopped with one command. As to whether the temporary depreciation will become permanent, the key factor is the degree to which the U.S.-China trade war intensifies.

In fact, one of Trump’s core ideas in starting this trade war was that the U.S. can increase tariffs, but China cannot let the yuan depreciate. This kind of thought is both arrogant and ridiculous. Trump is very clear that once the yuan depreciates, some of the effects caused by the tariffs will be offset. However, it is unclear whether he understands that by increasing tariffs, the yuan must be devalued. First, increasing tariffs will hurt Chinese exports, suppress China’s economic growth, and lessen willingness to invest in China. Thus, China must relax its monetary policy, which can of course cause the yuan to depreciate. Second, the growing trade war has weakened global trade and growth, causing increased uncertainty. As a result, funds are flowing to safer U.S. dollar assets, and Chinese assets will flow more quickly out of the country. Therefore, the market will of course anticipate the depreciation in the yuan, eliminating the need for the authorities to devalue it. These are the ABCs of economics and market operations. One can only hope that Trump actually understands them and is pretending to be confused; to imagine otherwise is scary.

Looking at the trend of the yuan over the past year confirms that the yuan exchange rate rises and falls with U.S. tariff measures. Its highest point was from February to March of last year, at a value of approximately 6.3 yuan per dollar. Starting last May, the U.S. imposed a 25% tariff on $50 billion worth of Chinese goods, later adding a 10% tariff on $200 billion worth of goods, after which the yuan quickly fell below seven. The difference in fluctuation just happened to be 10%, entirely offsetting the impact of U.S. tariffs on Chinese exports.

After the meeting between Trump and Xi Jinping, at which both sides agreed to stop ramping up the heat, the yuan miraculously increased in value by 38.2% (the golden ratio). This May, Trump again increased tariffs to 25% on $200 billion worth of goods, and the yuan once again depreciated. Now that the U.S. has announced a 10% tariff on $300 billion of goods, effective in September, and threatened a possible tariff increase to 25%, the yuan immediately broke the seven threshold. If the threat is implemented, it wouldn’t be surprising if the yuan depreciated to 7.2-7.3 yuan per dollar.

The U.S. announcement that China is a currency manipulator is merely a dog whistle in U.S. domestic politics to increase congressional and public support for Trump’s tariff measures. However, it is unlikely it will cause the U.S. dollar to depreciate against the yuan. First, the U.S. determination that China is a “currency manipulator” is unreasonable because currency manipulation by China is outdated and doesn’t fit the current standard of currency manipulation that the U.S. has established. Although China has a trade surplus, current account balances periodically experience trade deficits. Although Chinese officials interfere in foreign exchange markets, the effect on the exchange rate is to lower it, not increase it. Although the U.S. raised the issue with the International Monetary Fund, the IMF found no evidence that China was manipulating currency when it investigated a few months ago.

Second, the Trump administration does not have many tools it can use to drive down the dollar. Although markets worry that the U.S. will directly intervene in the exchange market, the U.S. is unlikely to sell the dollar. The current practice is to continue to pressure the Federal Reserve Board to cut interest rates and increase the interest rate gap between the dollar and the yuan. To achieve the desired results, however, the interest rate must be cut substantially, and the Fed might not necessarily cooperate to the degree needed. Moreover, the People’s Bank of China might follow suit by also cutting interest rates, cancelling out the maneuvers by the U.S.

Trump had a second core idea in starting the trade war: to intensify the war with a war. Pressuring the Fed to substantially cut interest rates by exacerbating the trade war can help U.S. economic growth − and Trump gets to engage in a currency war with other countries.

Therefore, while a currency war might take place, the battle might not be between the U.S. and China, because the U.S. is not in a position of power. The first battle might be a competition in depreciation between the U.S. dollar and the euro and yen. However, the scale will not be large because the central banks in the U.S., EU and Japan have limited room in which to relax policies.

The second battle will be between other emerging currencies, including the new Taiwan dollar, that are forced into a depreciation competition with the yuan. This will cause some emerging economies with large amounts of foreign debt to suffer greatly and might even trigger partial financial crises. This is the greatest worry when it comes to the effect this trade war and subsequent currency wars will have on global economies and financial markets.


人民幣對美元匯率終於在5日「破7」,當晚美股便重挫約3%;美國財政部打鐵趁熱,5日下午立馬宣布中國為「匯率操縱者」,使美中貿易戰延伸到全球匯率戰的風險升高,全球經濟與金融市場又平添一股低壓。

人民幣「破7」,是「真破」?或只是「暫破」?是破而後立?還是深不見底?從「破7」之後人民銀行便出手阻貶,美國及國際股市普遍回升,顯示中國當局目前傾向於「暫破」,先給川普一點顏色看看,讓他知道美國再對3,000億美元加徵10%懲罰性關稅,中國也有諸多報復工具,而且人民幣匯率說貶就貶,美國農產品進口說停就停。至於「暫破」是否會成為「真破」?關鍵因素在於美中貿易戰會升高到何種程度。

其實川普發動這場貿易戰的核心思維之一,就是「美國可以加徵關稅,但中國不能讓人民幣貶值」。這種想法既霸道,且可笑。他很清楚人民幣一旦貶值,至少能抵消一部分的關稅效應;但不確定他是否清楚只要加徵關稅,人民幣必貶無疑。首先,加徵關稅將不利於中國出口,壓抑中國經濟成長,打擊投資意願,因此中國勢必要放鬆貨幣政策,這當然能促貶人民幣;其次,貿易戰節節升高,削弱全球貿易及成長動能,更使不確定性大幅升高,導致資金流向安全性較高的美元資產,中國資金也會加速外流,因此市場當然會預期人民幣將貶值,根本不需要中國當局促貶。這些都是經濟原理與市場運作的ABC,但願川普只是揣著明白裝糊塗,否則真是不敢想像。

觀察過去一年多來人民幣走勢,也證實人民幣匯率就是隨美國的關稅措施起舞。人民幣的高點是在去年2-4月間,價位在6.3上下;去年5月起美國先對500億美元中國產品開徵25%懲罰性關稅,之後再對2,000億美元產品開徵10%關稅,人民幣也快速貶值到略低於7,高低差恰好也是10%,完全抵消了美國關稅對中國出口的衝擊。

12月初「川習會」雙方協議「停火」,人民幣神奇地回升了38.2%(黃金切割率)。到今年5月川普又將2,000億美元產品的稅率提高到25%,人民幣再度回貶;現在更宣布9月起再對3,000億美元產品加徵10%關稅,並威脅將把稅率提高到25%,於是人民幣一舉「破7」;如果威脅落實,人民幣貶到7.2-7.3都不意外。

美國宣布中國是「匯率操縱者」,只能算是一種高分貝的對內政治性喊話,使國會及民眾更加支持川普的關稅措施,但卻不大可能使美元對人民幣回貶。第一,美國這項認定並不合理,因為中國操縱匯率已經是過去式,現在並不符合美國所設定的「匯率操縱者」標準。中國雖有貿易順差,但經常帳收支卻不時出現逆差;中國官方雖干預匯市,但影響匯率的方向卻是阻貶,而非促貶。美國雖將與國際貨幣基金(IMF)交涉,但IMF幾個月前進行調查時並未發現中國操縱匯率的證據。

第二,川普政府並沒有多少工具可以壓低美元。市場關切美國是否會直接干預匯市,但美國不大可能直接拋售美元;目前作法就是繼續壓迫聯準會(Fed)降息,擴大美元與人民幣的利率差距;但要發揮效果,須大幅降息,Fed未必充分配合;而且人民銀行也可能跟進降息,使這招又告破功。

川普打貿易戰還有第二套核心思維,就是以戰養戰,藉由升高貿易戰迫使Fed不得不大幅降息,既能支撐美國經濟成長,又可以跟外國好好打一場匯率戰。

因此匯率戰未必不會爆發,但主戰場可能不在美、中之間,因為美國無從使力。第一個戰場,可能是美元對歐元及日圓競貶,但規模不會很大,因為美、日、歐央行的寬鬆空間都有限。

第二個戰場,則是其他新興貨幣被迫與人民幣競貶,包括新台幣,如此將使一些外債沈重的新興經濟體災情慘重,甚至引發局部性金融危機,這才是這場貿易戰與後續的匯率戰對全球經濟與金融市場的最大隱憂。
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