FX: China ponders implications for renminbi of Trump victory
The US president-elect has talked tough on China, but he could be good news for China’s economy and its currency.
2016: Year of the monkey and Trump – but how will the relationship pan out?
Donald Trump repeatedly cited China as a threat to the US economy on the campaign trail.
He railed against trade deals, including the Trans-Pacific Partnership (TPP), which now looks unlikely to pass, absent an abrupt U-turn from the president-elect. He also promised to designate China as a currency manipulator. Uncertainty over how his words will translate into action has been weighing on the RMB.
Khoon Goh, head of Asia research at ANZ, says: “Year to date, CNY has the rare distinction of being the worst-performing Asian currency, having depreciated 5.3%.
“Levels that were previously thought to be key psychological ones have easily been surpassed, including the 6.83 level where CNY had been pegged to the USD during the global financial crisis.” Alan Ruskin, macro strategist at Deutsche Bank, says: “If China is labelled a currency manipulator on day one of the Trump presidency, USD/CNY will remain a frontier for new skirmishes in the old ‘currency war’.”
However, it is by no means certain that Trump’s campaign rhetoric will translate into hard policy. Obama and Bush made similar assertions during their election campaigns, but when in positions of power they backed away from their tough stances.
“China does not meet the US Treasury’s current criteria for a currency manipulator,” says ANZ’s Goh, arguing it meets only one of the three criteria. Delivering on this pledge would therefore require a change of the criteria used to determine currency manipulation, something that might not be a priority in the early days of his presidency.
And the incoming president can reflect that in recent years China has taken steps towards liberalizing its currency. As USD has strengthened, daily yuan fixings have continued to follow the fixing mechanism established in February, suggesting Chinese authorities are not interfering with the process.
“The People’s Bank of China (PBoC) has been intervening in the FX market, but this is more to smooth the movements in the currency to limit volatility, rather than defending any particular level,” says Goh.
The PBoC’s net FX purchases showed dollar selling of $39.5 billion in October.
And while CNY has reached the weakest level against the USD since December 2008, the fact it has traded within a relatively stable range against other currencies suggests the move owes more to US dollar strength than renminbi weakness.
Where the Chinese have intervened, it has generally been in the US interest. “Telling China to cease FX intervention would only result in a weaker CNY,” adds Goh.
Casualties of war
If the US did open hostilities in a currency war with China, it might fear its own economic casualties. China could direct its currency in a way that hurts US risky assets and impacts Fed policy, notes Deutsche’s Ruskin, as it showed it could do in 2014 and 2015.
This would be in neither Chinese nor US interests, given China has its own concerns that rapid RMB weakening could cause a sharp increase in capital outflow pressures.
Having talked so much about trade deals during the election, Trump will be under some pressure to act on TPP, as well as its bilateral trade relations with China. Yet the US trade deficit with China has fallen this year, whether using US or Chinese figures, says Brown Brothers Harriman.
So of the many promises he made while campaigning, trade with China might not be the most pressing. The Bank of Montreal predicts Trump will avoid attempting to renegotiate the China/US bilateral trade relationship until after the Mexican wall issue has been resolved.
It is hard to see a way back for TPP, but while its demise will be disappointing for China, it “will create additional space for China to sign either regional or bilateral agreements with other Asian economies”, says Alicia García Herrero, chief economist for Asia-Pacific at Natixis and senior research fellow at think tank Bruegel.
China has taken steps towards a regional trade agreement in the Regional Comprehensive Economic Partnership (RCEP), which also includes the 10 Asean countries, Australia, India, Japan, New Zealand and South Korea.
Rabobank states: “Altogether, the RCEP could cover around 27% of global trade in a region in which China is already the dominant trading partner. A regional trade deal has the potential to raise China’s global standing as well as within Asia.”
This could be compounded by a more isolationist US, which would allow China to be more assertive, improving its economic ties with countries that have traditionally been under strong US influence, says García Herrero.
If countries such as Mexico find they are being shut out of the US market, there might be an opportunity for China to do more business with them.
China will also watch developments at the Fed with interest. Trump has been critical of the Fed and its chair Janet Yellen, who he implied has been too cosy with Obama, and by extension Clinton.
Therefore, many are predicting he will replace her, if not immediately then when her term ends in 2018, with someone likely to support his own monetary agenda. García Herrero says that is likely to mean lax monetary conditions to support growth.
“[If that happens] investors will need to entertain the idea of looser monetary conditions than expected before Trump’s victory, [which] should be music for China’s ears,” as a remedy for its problems with capital outflows in recent years, adds García Herrero.
She concludes: “In a nutshell – and abstracting from a much higher geopolitical risk for China, which could actually overrule any positive economic impact – the reality is that, economic speaking, Trump might not be such a horrible news for China after all.”