With the continuous U.S.-China trade frictions, it appears that things would get worse in the future. U.S. President Donald Trump recently said that he is preparing to increase the scope of tariffs to USD 500 billion of Chinese goods. "I'm not doing this for politics, I'm doing this to do the right thing for our country," Trump said. "We have been ripped off by China for a long time."
As the trade friction deteriorated, Anbound warned that there is another "war" between China and the United States, which is the suppression of China's financial market. We had previously pointed out that unlike trade reciprocal retaliation, the suppression of financial markets is asymmetric. China will bear greater and almost unilateral suppression, involving multiple markets such as foreign exchange markets and stock markets. It should also be noted that as financial markets are under pressure, the most feared systemic financial risks of China begin to become dominant.
This concern of Anbound seems to be verified. At a time when the United States launched a trade assault against China and the European Union, U.S. President Trump began turning firepower to the exchange rate issue. According to a number of foreign media reports, Trump said in an interview with the CNBC on July 19 that "… [i]n China their currency is dropping like a rock and our currency is going up, and I have to tell you it puts us at a disadvantage" and accused China to manipulate the RMB exchange rate to ease the impact of the U.S.-China trade war. On July 20, he once again posted on social media to criticize China and the European Union for lowering the exchange rate.
Generally, the U.S. president will always defend the strength of the dollar, yet Trump complained about the appreciation of the dollar since March 2018 and expressed dissatisfaction with the Federal Reserve's policies. Trump pointed out that the European Union and other economies maintain accommodative monetary policy, leading to the depreciation of the euro and other currencies and the appreciation of the dollar. Trump expressed this sentiment in his tweet, "China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field".
Trump is rather concerned about the impact of the exchange rate issue on the U.S. foreign trade, which has become a special focus of the Trump administration. The Secretary of Treasury Steven Mnuchin said in a high-profile manner on July 20 that he is monitoring the recent weakness of the RMB and will analyze whether it involves currency manipulation. Mnuchin said in Brazil that the weakness of the RMB would be part of a semi-annual report drafted by the U.S. Treasury on currency manipulation, which will be published on October 15. When asked if he is worried about China's use of the RMB as a "weapon" for Chia-U.S. trade frictions, Mnuchin said, "I'm not saying whether it's a weapon or not a weapon. There's no question that the weakening of the currency creates an unfair advantage for them", "We're going to very carefully review whether they have manipulated the currency".
The situation has gradually become clearer; the trade frictions with tariffs as the core are evolving into extensive economic and financial frictions. Judging from the Trump administration's position, the U.S.- China trade friction is further expanding, shifting from trade to exchange rate. However, Trump's views on the impact and reasons for the depreciation of RMB have been incorrect. We believe that the RMB depreciated under a variety of unfavorable factors and reflected market behavior, not the manipulation of the Chinese central bank. The other side of the devaluation of RMB is the strengthening of the U.S. dollar and the flood of funds into U.S. dollar assets; this is also the result of the global funds under the risk aversion. However, Trump considers this as the work of the Chinese government and believes that China is manipulating the RMB exchange rate and trying to offset the impact of the trade war by depreciating RMB.
This is actually a misunderstanding on the part of the United States. What the Chinese government is really worried about is that the market expectation is too bad that the RMB exchange rate would depreciate sharply, causing serious capital outflows and forming a vicious circle of "depreciation-capital outflow- further depreciation". Based on this concern, China will take measures against this possibility, such as giving priority to protecting foreign exchange reserves; in actual implementation, restricting cross-border capital flows; if the RMB depreciates excessively, the central bank may moderately intervene and maintain 7 as the bottom line.
Trump's currency war is not only targeting RMB, but also for the euro and the European Union. From the perspective of Trump's cognition, he does not let go off the trade deficit, and he is holding tight of the "America First" target, which means he will not hesitate to sacrifice trade. This practice appears to be illogical has disrupted the world's situation and shaken some of the foundations of the world's previous systems like free trade policies and multilateralism.
Final Analysis Conclusion
As RMB continues to depreciate, the Trump administration is pushing the U.S.-China trade frictions towards the RMB exchange rate. The second U.S.-China"battlefront" that Anbound once worried and warned about is likely to start soon.
