Mnuchin threatens China against currency devaluation as yuan continues to fall. Fails to understand that Trump’s Trade War and tariffs are the real reason China’s currency is falling like a rock!
U.S. Treasury Secretary Steven Mnuchin displayed a remarkable and embarrassing lack of understanding of the world’s currency and financial markets earlier today when he all but accused China of purposely depressing and devaluing its currency.
Given he is a former partner at Goldman Sachs, his ignorance is more shocking evidence that there’s no one in the Trump Administration capable of understanding the potential dangers of continuing the ill-advised Trade War against China.
In a Financial Times interview published Wednesday, Mnuchin warned Beijing against engaging in a competitive devaluation of the yuan as the two countries continue to battle each other over trade.
“As we look at trade issues, there is no question that we want to make sure China is not doing competitive devaluations,” Mnuchin said, according to the Financial Times, in an interview ahead of meetings of the Group of 20 nations, International Monetary Fund and World Bank in Bali, Indonesia.
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China’s yuan has dropped nearly 11% from its 2018 peak in March and is trading within striking distance of 7 per dollar, an important psychological support level. While some economists and market analysts are attributing much of the weakness in the yuan since March to China’s slowing economy but the real culprit is, in fact, President Trump’s Trade War.
Trump’s 25% tariffs on more than $200B of Chinese imports is the main reason economic growth in China is slowing – still at over 5% officially. U.S. exports represent almost 18% of China’s total worldwide trade. Mnuchin’s lack of understanding of basic economic only furthers the poor decision making by the Trump Administration in its Trade War with China.
China’s yuan could easily fall another 14% without Chinese efforts to buttress the currency with massive market purchases. Such an action would in the long term be useless because at the heart of the decline is Trump’s Trade War. The international currency market is responding naturally to Trump’s tariffs and the perception that lower economic growth caused by them will debase the value of the yuan. A drop in the value of the yuan of 25% could offset all of the tariffs imposed by Trump.
In Hong Kong, an offshore trading hub for the yuan, there’s been a sharp rise in interbank lending rates that could be reflecting efforts by China’s central bank to prevent the currency from weakening too much according to a Wall Street Journal report. Observers are suggesting China could be looking to manage the decline in the value of the yuan to prevent a sudden decline over a few days and instead allow the Chinese currency to slowly fall to its equilibrium. Yet there are risks of the Trump Administration mishandling the rebalancing of the value of the yuan by continuing its pressure on Mnuchin to formally designate China a currency manipulator. If Mnuchin takes this action, it’s entirely possible that the yuan takes a nose dive. Adding to the danger is the possibility that China will boycott upcoming Treasury sales of securities. China has been for many years the largest investor in U.S. Treasury securities.
Analysts have pointed out that China doesn’t have to sell any of its U.S. Treasury stock pile to cause big problems for the United States. All it has to do is just stop buying any more U.S. debt. The result of a Chinese boycott on U.S. Debt would be higher interest rates in the United States that in turn will continue to pressure the U.S. dollar higher and the yuan lower.
Mnuchin’s lack of understanding of this basic interdependent relationship between the finances of the United States and China is shocking and could result in a major economic worldwide disruption.