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Commentary
The U.S. Treasury has gone on record encouraging Beijing to raise the yuan’s value against the U.S. dollar. The authorities in Beijing, most especially the People’s Bank of China (PBOC), seem willing, indeed eager, to comply with Washington’s wishes. Despite the apparent goodwill and agreement, the two parties are hardly on the same page.
Washington is thinking in terms of trade. A strong yuan will raise the prices of Chinese goods on global markets, including in the United States, and slow the flow of Chinese exports, effectively exaggerating the effect of the tariffs imposed on Chinese goods.
China has embraced the advice not because it wants to comply with the U.S. Treasury but rather because Beijing seems to care less about trade these days than about the
internationalization of the yuan and Chinese leader Xi Jinping’s ambition to see the yuan eventually supplant the dollar as the main medium of international exchange and store of value, what bankers and economists refer to as the “global reserve currency.” Of the two motivations, Washington’s is the more immediate and practical.
The U.S. Treasury seems to be working from Beijing’s old playbook. For a long time, Chinese policy sought to suppress the yuan’s foreign exchange value. By keeping the yuan cheap, China’s exports would carry attractively low prices on world markets, most notably in the United States, encouraging exports and boosting China’s overall pace of growth. The PBOC actively entered currency markets to target a cheap yuan.
Especially during President Donald Trump’s first term, Washington decried this currency strategy. In 2017, Trump accused China of being “grand champions at manipulation of currency.” Currency manipulation is a term of law that would invite U.S. retaliation and may support a case for it with the World Trade Organization.
Officials at the White House and the U.S. Treasury received a kind of confirmation that Beijing was engaging in yuan manipulation when the yuan’s value fell by more than 14 percent against the dollar right after the Trump administration imposed tariffs in 2018 and 2019. That drop reduced the price of Chinese exports to Americans sufficiently to offset the effect of the tariffs. Accordingly, after a brief interruption, Chinese exports to the United States continued to rise, seemingly unaffected by the tariffs.
This is the past. China is no longer working off a trade-centered playbook, or at least seems not to be. Beijing has made clear that it is more concerned now with the internationalization of the yuan.
Since the first Trump term, Beijing has actively
pursued trade deals that settle in yuan instead of dollars, as most trade deals do even when an American is not involved. It has actively advanced international yuan-denominated loans, most notably within the Belt and Road Initiative, though not exclusively there. A stronger yuan on foreign exchange markets helps this internationalization effort. The PBOC has set successive yuan targets accordingly.
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The yuan has
appreciated against the dollar by fully 5 percent in just the last 10 months, with little interruption. That move has increased the price of Chinese goods to Americans, effectively exaggerating the effect of the tariffs that the White House put in place on Chinese goods last year.
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The tariffs alone contributed to an almost 40 percent drop in China’s
exports to the United States between March and November last year. The yuan appreciation will reinforce that downward momentum. Washington, with its focus on trade, wants more of the same. China, with its focus on internationalization, wants to give it.
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To some extent, both parties can win in this exchange. Washington can get its way on trade
, while Beijing leverages the strength of its currency. The timing of these wins, however, is likely to be very different. What Washington wants is immediate. Beijing is playing a much longer game and will not achieve its objective—if it ever does—for some time to come, especially since supplanting the dollar as the global reserve currency will require many other difficult
adjustments from Beijing. If Washington has mistaken Beijing’s thinking, it still might gain from the exchange.
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Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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Udumbara
