{"id":104625,"date":"2017-04-10T09:51:14","date_gmt":"2017-04-10T13:51:14","guid":{"rendered":"http:\/\/countingpips.com\/?p=104625"},"modified":"2017-04-10T09:51:14","modified_gmt":"2017-04-10T13:51:14","slug":"us-dollar-and-chinese-renminbi-mysteries-revealed","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/04\/us-dollar-and-chinese-renminbi-mysteries-revealed\/","title":{"rendered":"US Dollar and Chinese Renminbi: Mysteries Revealed"},"content":{"rendered":"
April 10, 2017<\/div>
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By Dan Steinbock<\/strong><\/p>\n

The Trump administration\u2019s exchange-rate hawks contend that the US should designate China as a \u201ccurrency manipulator.\u201d In reality, the problem is the strengthening dollar, despite massive debt US owes to foreign countries.<\/strong><\/p>\n

Before the Trump-Xi Summit, the White House has often warned about \u201ccurrency manipulators\u201d while targeting US trade deficits.<\/p>\n

After the Summit, US Treasury Secretary Steve Mnuching was asked whether the Trump administration will move forward with a plan to label China a currency manipulator. \u201cThe currency report is going to come out in the near future, and we will address that when it comes out,\u201d Mnuchin responded.<\/p>\n

A (very) short history of US dollar and Chinese renminbi<\/strong><\/p>\n

For years, China pegged its currency to the US dollar. Due in part to pressure from its trading partners, Beijing in 2005 appreciated the renminbi (RMB) to US dollar by 2.1 percent and moved to a \u201cmanaged float\u201d exchange rate system, based on a basket of foreign currencies.<\/p>

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Subsequently, the bilateral exchange rate stayed around 6.83 RMB from July 2008 to June 2010 for damage control amid the Great Recession. Currency appreciation was resumed in June 2010, but at a slower pace than in previous years.<\/p>\n

Despite claims of devaluation, the RMB actually appreciated by 35 percent on a nominal basis against the dollar from June 2005 through July 2015.<\/p>\n

In August, 2015, China\u2019s central bank took new measures to improve the market-orientation of its daily central parity rate of the RMB. This was vital to support the internationalization of the RMB. Over the next three days, the RMB depreciated against the dollar by 4.4 percent – not because the central bank was opposing the market forces but precisely because it allowed those forces to affect the currency more than before.<\/p>\n

Strengthening dollar<\/strong><\/p>\n

From July 2015 to mid-December 2016, the RMB depreciated by 13.6% against US dollar. As the US Federal Reserve has taken steps toward interest rate normalization, US dollar has strengthened.<\/p>\n

Last fall, US dollar hit its 14-year high. It has been fueled by rising government bond yields (and the Fed\u2019s anticipated rate hike), and expectations of Trump\u2019s fiscal expansion (infrastructure stimulus).<\/p>\n

After last January\u2019s correction, US dollar remains strong. \u00a0In the next three quarters, it will be supported by the Fed\u2019s anticipated rate hikes.<\/p>\n

In theory, the Trump administration continues to support a \u201cstrong dollar policy.\u201d In practice, it will not tolerate greater dollar appreciation in the short term. That\u2019s the real reason for efforts to target China, Japan and Germany for \u201ccurrency manipulation\u201d (read: widening US trade deficits).<\/p>\n

Yet, the very notion of “currency manipulation” is flawed. All governments take actions that directly or indirectly affect the exchange rate. In the past decade, this has been more of a rule than an exception. Moreover, reckless budget deficits can lead to a weak currency; so can low interest rates.<\/p>\n

Debt burden requires weaker dollar<\/strong><\/p>\n

Today, the consensus is that the US-Chinese exchange rate is pretty much where it should be. In early January, US dollar climaxed at 6.96 RMB. After China began to curb speculation in the RMB depreciation, things have steadied and today a dollar equals 6.89 RMB.<\/p>\n

Meanwhile, calls for a weaker dollar are increasing in the US. There is a deep gap between what the US owes other countries and what other countries owe to the US. And that gap is now climbing to a danger zone. Consequently, it would require a weaker dollar.<\/p>\n

As the US must borrow ever more to finance its trade deficit, rising debt is pushing America deeper into the red. In the last quarter of 2016, foreign ownership of US debt outpaced US claims on foreigners by $8.4 trillion, which translates to a deficit that\u2019s almost half of US GDP. Currently, it is projected to exceed 53 percent by 2021, but that could happen a lot faster if the Trump administration cuts taxes and Congress expands the budget deficit.<\/p>\n

By some estimates, an effort to stabilize the borrowing deficit at 50 percent of the US GDP would require halving the trade gap to 2 percent of GDP by 2020, instead of the projected 4 percent path. That, however, may not be viable without 14 percent depreciation in the dollar.<\/p>\n

The problem in the US\/RMB exchange rate is not the alleged currency manipulation in China (or elsewhere). Rather, US twin deficits cast a long, potentially dangerous shadow over the US economy, which no longer justifies a strong dollar.<\/p>\n

About the Author:<\/em><\/strong><\/p>\n

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center\u00a0(Singapore). For more, see http:\/\/www.differencegroup.net\/\u00a0<\/a><\/p>\n

The original, slightly shorter commentary was released by Shanghai Daily on April 10, 2017<\/p>\n

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By Dan Steinbock The Trump administration\u2019s exchange-rate hawks contend that the US should designate China as a \u201ccurrency manipulator.\u201d In reality, the problem is the strengthening dollar, despite massive debt US owes to foreign countries. Before the Trump-Xi Summit, the White House has often warned about \u201ccurrency manipulators\u201d while targeting US trade deficits. After the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-104625","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104625","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=104625"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104625\/revisions"}],"predecessor-version":[{"id":104626,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104625\/revisions\/104626"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=104625"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=104625"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=104625"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}