The invisible hand of Adam Smith and free market economics is not exactly what politicians and traders are referring to when speaking of the movement of the Chinese yuan. Strong election rhetoric by President Trump regarding Chinese currency manipulation is gaining traction again. In a tit-for-tat struggle between the world’s two largest economies, nothing is being left off the table.
Currency manipulation or currency intervention is a monetary policy operation which occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate and trade policy. In a nutshell, the following depicts how China or any country can weaken their currency against the U.S. dollar:
Market data suggests intervention. The currency, which had fallen as much as 1.1 percent in early trading in mainland China—hitting its lowest intraday level since Aug. 7—recovered to close down 0.3 percent, with one dollar worth 6.6672 yuan on July 3rd. The yuan’s rapid slide is nothing new, as the Chinese have intervened in the past to protect its export market and prop up its GDP. Traders have been somewhat encouraged by China’s central bank chief Yi Gang on Tuesday, when he stated the government would step in as necessary to slow the rate of downward momentum.
The Chinese central bank can manipulate its target price for the yuan, but with the adversity that is facing its local economy, it is somewhat of a juggling act. “The pressure of monetary policy to balance domestic and external stability is big, and room to maneuver is becoming even smaller,” Xu Zhong, director general of the PBOC Research Bureau, said at a forum in Beijing last week. “Monetary policy can’t do everything, especially under conditions where external shocks are constantly increasing.”
The recent surge in the dollar via the yuan has put its value near roughly 6.7 yuan per dollar, which is a spot that the Chinese central bank likes. In a manner unlike the U.S. Fed, The PBOC determines a daily “fix” for the dollar against the yuan, and allows the currency pair to trade within a range above and below that level. Also in the mix is the PBOC’s statement that it plans to lower the member banks reserve requirement, allowing for liquidity in the markets. As such, it is difficult for many economists to determine what the net monetary policy of the Chinese central bank actually is.
Monetary issues aside, the central control of Chinese fiscal policy is more or less Keynesian in its dynamic to prime the economic pump through the use of massive government funded projects. However, high levels of both consumer and public debt have made this an increasingly less viable option. Thus, the PBOC is slashing taxes for imported goods to encourage domestic consumption. Economics is far from an exact science, and financial modeling can only go so deep. “Pipelining these priorities is a tricky game,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank Ltd in Hong Kong. “One mistake could cause big risks, and it’s just easy to make mistakes.” Capitalism and communism collide as both the U.S. Fed and the PBOC struggle to find an economic balance in these uncertain times.