Donald Trump is now president and has constantly harped on China and Mexico as the bogey man in international trade. He believes that they are preying on the American people and businesses.
In particular, he wants to brand the Chinese as currency manipulators and put on economic sanctions against them. This would likely take the form of much higher tariffs against Chinese goods coming into the US.
His basic complaint is that the Chinese have manipulated their currency lower in an effort to lower the price of Chinese goods. This would then make Chinese goods cheaper than American made goods and run the Americans out of business.
In fact, the Chinese unit rallied dramatically until the beginning of 2014. The central bank of China was given high praise for maintaining a strong currency in the 2008 crisis and for being a rock of stability.
But things changed in 2014 and the Chinese government began a policy of currency depreciation. Why?
We all know that the Chinese lie with their economic statistics. That is common knowledge.
But their growth rate dipped to multi-decade lows even according to their own calculations. We saw growth in the low 7% area.
At the same time, we saw the head of China, Xi Xiping start to centralize power in his own hands, a process that continues to this day. He is the first Chinese head to centralize power since Deng Xioaping freed the people from much of the autocratic power of the State.
China must create massive numbers of jobs each year to reduce social pressures. Tens of millions of people are moving from the country to the cities each year and jobs must be created for them to make sure they don’t riot and even topple the government.
At the same time, lower cost countries like Viet Nam started to eat away at the market share of Chinese goods in markets like clothes.
So Xi Xiping started to depreciate the currency for exactly the reason Trump stated. To lower the price of Chinese goods in the world market.
The Chinese unit dropped from 6.0 to the dollar all the way down to 6.8 to the dollar now. In fact, we are now at a record low level for the yuan.
But Trump’s election throws this calculation of the Chinese government into question. Continuing the depreciation of the yuan will definitely cause Trump’s government to brand the Chinese as currency manipulators and slap high tariffs and other penalties on them.
Of course, this will cause the Chinese to reciprocate against the US.
However, the Chinese economy needs the US economy far more than the US economy needs the Chinese economy.
So China will back off their currency depreciating and at least stabilize the yuan, perhaps even move it a little higher over the short run to stave off any Trump attack.
One problem is that the depreciation of the yuan is also reflective of massive outflows of capital from China. Hundreds of billions of dollars have been shipped out of China largely because of newly minted millionaires wanting to move they money overseas to protect it. This is a major cause of selling of the yuan. Xi Xiping allowed the yuan to depreciated to create lower prices for export goods but the yuan would have depreciated without the Chinese government wanting it lower.
The Chinese are already probably moving to support the yuan. For years, the Chinese were the biggest buyers of US treasuries, buying at least hundreds of billions of dollars each year and peaking at $1.278 trillion according to 2014 numbers released by the US Treasury.
However, it is commonly believed that they have sold over $200 billion of those treasuries in the last two years alone to get capital back to China. Of course, that means that they have to sell US dollars and buy Chinese yuan to accomplish this.
This shift from treasuries is likely the major supporting factor for the yuan.
The bottom line is that the yuan will likely rise in the coming year, starting right now. The Chinese government cannot afford to allow the US to brand them a currency manipulator and punish them. The cost to their economy would be too great.
So they will stamp down on outflows of money outside the country, such as the crackdown on gambling in Macau. They will continue to sell US treasuries because they need the money back in China. This will also cause upside pressure on US interest rates.
Look to buy the yuan starting right now.