China’s leaders appear to have concluded that they won’t secure an acceptable trade deal with President Trump. What they can do is try to weather the next 18 months while inflicting maximum political damage—and hope a weakening U.S. economy delivers a new president.
Letting the yuan weaken over 1%, passing the key level of seven to the dollar, was clearly meant to provoke. Shortly after the currency crossed the line Monday morning, China’s central bank released a statement pegging the weakness to “protectionist measures and expectations of increased tariffs on China.” Beijing also confirmed early Tuesday that Chinese companies had ceased new purchases of U.S. agricultural goods. The U.S. has responded by formally labeling China a currency manipulator.
Why the sudden hawkishness from Beijing?
One reason may be that China’s leaders, like many investors, have concluded that Mr. Trump is more interested in strong-arming U.S. rates lower than making a deal on trade—and may even see trade tensions as a way to squeeze the Fed.
Beijing would love both a trade deal and lower U.S. rates. But lower rates alone would be a huge help: China could keep easing its own monetary policy and allow moderate yuan depreciation—both needed to shore up growth—with a smaller risk of big capital outflows. To the extent that China has been intervening in currency markets, it has largely been to slow depreciation and prevent outflows.
Being able to blame a big yuan drop on Mr. Trump—rather than, for instance, on poor-quality assets at home—is actually rather helpful. So far, the market reaction appears to validate this strategy. The yuan sold off sharply Monday but strengthened Tuesday. And forward markets have remained relatively stable. One reason: Unlike in 2015, China’s central bank has been saying for weeks that seven was no hard and fast line.
Moreover, to the extent that Mr. Trump is determined to keep pushing tariffs higher regardless of what Beijing does, trade tensions have the advantage of damaging the U.S. economy and the president too. The U.S. manufacturing purchasing managers index for July was the weakest since late 2016, with new export orders leading the way lower. China’s economy is still shaky, but June and July data contained hints that the pace of the slowdown may be easing.
All of this gives Beijing a strong incentive to wait and see. If it must endure tariffs, then the obvious strategy is to take advantage of falling U.S. rates and allow the yuan to take some—but not too much—of the pressure.
Write to Nathaniel Taplin at firstname.lastname@example.org
Corrections & Amplifications
The U.S. designated China a currency manipulator after Beijing’s announcement on agricultural purchases. An earlier version of this article incorrectly stated the designation came before the announcement. (Aug. 6, 2019)
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