Xi’s calculus on the yuan may depend on what Tokyo does with the yen. Photo illustration: iStock
Xi’s calculus on the yuan may depend on what Tokyo does with the yen. Photo illustration: iStock

Xi Jinping’s big trade speech on Tuesday was music to Donald Trump’s ears. The Chinese president pledged to open Asia’s biggest economy, cut tariffs and strengthen intellectual property right protections. It hit virtually all the right notes.

That is, except for the most potentially discordant one: a yuan devaluation.

President Xi’s lofty talk at the Boao Forum against cold-war mentalities and zero-sum mindsets glossed over antiquated ideas of currency wars. Granted, US President Trump started it, adopting the beggar-thy-neighbor strategy Washington once abhorred. On Jan. 24, Trump’s Treasury Department declared dead the 23-year-old strong-dollar policy.

The omission from Xi’s remarks indicates Beijing is reserving the right to counter Trump’s actions in a spectacular way. The plot thickens when you consider an April 9 Bloomberg News report that China is mulling the yuan’s utility as leverage in trade negotiations. A devaluation wouldn’t just offset the impact of Trump’s tariffs, but cow him into easing tensions.

Or not. Given Treasury Secretary Steven Mnuchin’s comment that “obviously, a weaker dollar is good for us as it relates to trade and opportunities” marked an about-face in US doctrine, a bedrock principle. When the dollar plunged in late January, the White House tried to walk back the comment. It was no use, though. Trump, after all, had long complained the strong dollar “is killing us.”

Just wait until China throws a weaker exchange rate Trump’s way. For all Trump’s yuan-bashing, it’s rallied roughly 9% since he entered the White House in January 2017. China’s currency also has held mostly steady in the 10 weeks since Washington began slapping tariffs on a fast-increasing number of goods.

Stock markets haven’t been as robust. The Shanghai Composite Index, for example, is down about 11% since its late January peak. The selloff speaks to the level of investor panic about Trump’s tariffs savaging China’s export engine. So far, Trump has announced roughly $150 billion of tariffs on mainland imports – with threats of bigger actions to come. As China matches Washington’s levies, Trump’s team is sure to continue escalating tensions.

There are risks all around. One is that Trump would formally label Beijing a currency manipulator. A sharply weaker yuan would make it harder for China Inc. to make payments on offshore debt and slow progress in opening the capital account and moving to a more flexible exchange rate. Increased volatility could make life difficult for Xi’s new financial dream team.

Last month, Xi named Yi Gang his new People’s Bank of China governor and Guo Shuqing as the Communist Party secretary of the PBOC. Both men, reformers in their own right, will report to new Vice Premier Liu He. Xi’s three wise men are charged with pulling off modern history’s most perilous balancing act: tackling dueling bubbles in debt, credit and property without crashing the No. 2 economy.

Trump’s trade war adds another layer of complexity. So do the three or four interest-rate hikes Federal Reserve Chairman Jerome Powell is telegraphing for the months ahead.

On the yuan, some of Xi’s calculus may depend on Tokyo. As Trump’s only real ally among world leaders, Japan’s Shinzo Abe would be loath to raise Washington’s ire by weakening the yen. Every Trump relationship is vulnerable to an early-morning Twitter storm. Trouble is, Abenomics is wildly vulnerable to a yen surge (it’s up more than 5% so far this year). If the Bank of Japan were to cap the yen, the currency war spreads to new theatres.

Yet Xi is the real wildcard here. By reserving the right to match Trump’s devaluation bet, and raise him, Xi’s Boao Forum wasn’t the tonic markets think. Talk about a potentially discordant note for the global economy.

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