As if Xi Jinping didn’t have enough to worry about, China’s president is now obsessing over currency speculators.
Xi’s lead banking and insurance official Guo Shuqing says traders “shorting the yuan will inevitably suffer from a huge loss.” If that isn’t drawing a line in the foreign-exchange sands, what is?
Yet Beijing’s troubles may be bigger than that if Donald Trump adds a currency front to his trade war.
The US president stepped up to that line Wednesday. His Treasury Department added Singapore, Malaysia and Vietnam to its watchlist for currency manipulation. China is there, of course, as are Shinzo Abe’s Japan and Moon Jae-in’s South Korea. But Wednesday signaled a scaling up of Washington’s ploy to win a more advantageous trade position.
It’s also the last thing the global economy needs as the trade war slams growth from Seoul to Jakarta and from Beijing to New Delhi.
Hypocrisy is breathtaking
It’s one thing, arguably, for say, Indonesia to go the beggar-thy-neighbor route. Quite another for the world’s biggest economy, and printer of the reserve currency, to go that way.
The hypocrisy is rather breathtaking. Trump arguably has done more over the last two years to weaken the dollar than Xi. The yuan is basically unchanged since Trump’s election in November 2016 even as China’s growth has lost considerable altitude.
Nor has Xi browbeaten the People’s Bank of China to devalue the yuan, unlike Trump, who’s practically fired his Federal Reserve chairman for not going the way of the Bank of Japan. Xi, frankly, has a plausible case that Trump’s Washington is doing more manipulating than Beijing.
Even so, adding Singapore, Malaysia and Vietnam to the list seems somewhat gratuitous.
Singapore is only in harm’s way because of its sizable current-account surplus and net foreign currency purchases – roughly US$17 billion worth in 2018, or 4.6% of gross domestic product. Malaysia sticks out, in Trump-adjusted terms, for a $27 billion bilateral trade surplus with the US and Vietnam for a sizeable current-account surplus.
Good and bad news
The good news is that Treasury Secretary Steve Mnuchin stopped short of formally branding Asia’s economies, including China, as manipulators. The bad news: Who really believes the Trump White House won’t do just that in the months ahead?
That’s not to say Mnuchin’s statement Wednesday was devoid of useful insights. It’s hard to argue with the Treasury’s take that Singapore needs to boost its rather low domestic consumption rate. That might reduce the sizable external surpluses catching Washington’s attention.
But some US allies have been quick to push back. Malaysia’s monetary authority, Bank Negara, said: “The ringgit exchange rate is market-determined and is not relied upon for exports competitiveness.”
What’s odd, though, is how the US appears to be trying to raise its own economic game by hoping others do less well. The Treasury’s previous threshold for manipulation was a current account surplus of 3% of GDP. That has now been lowered to 2%. Any trade surplus with the US in excess of $20 billion also puts a nation on the watchlist.
China the common thread
Of course, persistent intervention in currency markets is an obvious no-no for Team Trump. That explains why Japan has been so tolerant of a rising yen during the Trump era. In that sense, is Vietnam risking a “manipulation” label? Perhaps.
Yet the common thread here may be China. Notice that India didn’t make the Treasury’s cut, while all of the Southeast Asian nations that did have deep mainland trade ties. And though China and Japan are barely on speaking terms, their trade relationship tells a vastly different story. China is now Japan Inc’s main customer.
Trump’s FX enemies list seems more about grievance than economic fundamentals. In his telling, Tokyo’s $60 billion trade surplus with the US means Prime Minister Abe’s nation is scamming Trump’s by that amount. This worldview matters, says Yale University economist Stephen Roach, because Trump’s strategy can be boiled down to “Japan then, China now.”
In the 1980s, when Trump was an up and coming real estate mogul, he viewed Japan as the predatory and unscrupulous player he does Xi’s China today. The problem, Roach says, is that Trump spends far more time bashing others than addressing America’s challenges.
A weaker dollar might help next quarter, but it won’t increase innovation and productivity. It won’t upgrade crumbling infrastructure. And it won’t prod the US to live within its means and stop borrowing with abandon.
Trump does not only see China as the problem. He sees it as the solution. Yet his latest strategy – a potential currency war on top of his tariffs – will leave everyone worse off.