Mr Trump and others can argue hidden conspiracy theories all they like .... so far, the evidence is lacking.

Tuesday 7th June 2016

Mr Trump and others can argue hidden conspiracy theories all they like .... so far, the evidence is lacking.

ref :-  China's currency  --  " Bending, not breaking " , The Economist , Finance and economics

History is full of periods during which economic hard times have fostered a disenchantment with mainstream politicians and the emergence of populist rivals from both the left and the right. The present era will surely go down as a prime example of the type, and on a global scale. By their very nature, the new figureheads will embrace causes that appeal to the downtrodden electorate and find individuals and entities to pin the blame on. Very often, they are mistaken in their conclusions but if you base your policy so squarely on emotion rather than cold analysis, that can happen.

In the case of Donald Trump, now a contender for the position of "most powerful human on the planet" , just one of the villains that he has chosen to point the finger at for the travails of America's working men and women is China. The thinking goes that China has ridden roughshod over a supine United States in an undeclared but blindingly obvious trade war, and is now intent on furthering its competitive advantages by engineering a progressively weaker currency  --  the Yuan / Renminbi. It's an undeclared currency war in fact. It's yet another bold statement from a man who is basing his whole new career on such bon mots, but is it true ? On the evidence alone, you'd have to say no ..... or not yet at least.

It's worth remembering that accusations that China was manipulating its currency lower first resurfaced last  August when China decided to let market forces play a much bigger role in deciding the level of the Yuan. The move did bring about an immediate de facto devaluation of China's currency it's true, albeit of only about 3% (6.21 to 6.40 -v- USD approx.). But economic powers outside China had long been arguing that the Yuan and Chinese markets generally should be more market-driven and less controlled by the central authorities .... is it fair therefore to cry "Foul " if the market levels don't suit you or the prospects for your exports ? The subsequent weakening of the Yuan out to the 6.60 level by January can be explained as a function of dollar strength rather than deliberate Yuan weakness, though some would no doubt call such rationale naive .

That would ignore the fact that the Chinese authorities are bound to maintain the Yuan's credibility as it establishes a new role as an international reserve currency, and they have pumped an awful lot money into foreign exchange markets to support it . They have also tightened capital controls once again to stop an outflow of cash. The result ? The US dollar is trading against the Yuan (USD / CNY) at almost exactly the same level as in early January  --  hardly evidence of an aggressive devaluation policy on China's behalf.

That said, you could argue that China has been a bit lucky. Most of the big boys were expecting the US unit to continue its inexorable rise this year, and not many foresaw the sharp reversal in the greenback's worth that put a temporary lid on any devaluation accusations. And just in the last few days as the Dollar regained its highest levels on rising chances of a June or July rate hike, along came a shocking set of US employment numbers that makes a rate hike unlikely until December, if you believe what Fed Funds Futures markets are saying.

Whether they believe in China's commitment to reforming how the price of its currency is set or not, few would deny that Beijing has been a bit clever in its operations. It has indeed established a new mechanism whereby the Yuan level is much more responsive to market forces, but that's a long way from saying it's free from control entirely. The authorities can and do intervene in the markets either directly or through state-owned banks (although far more often than not this is to support the Yuan). Capital controls are still too strong for those wanting China to emulate its longer-established trading partners, but then again do they want to risk a suddenly much weaker Yuan ? And most irritating of all for its critics, China has tended to hitch the Yuan to the dollar when the dollar is weak, but reverted back to what is portrayed as their preferred measure against a traded-weighted basket of currencies when the dollar is strong, thereby ensuring the best of both worlds in terms of USD / CNY.

All of which is to say that China has gone a fair way towards reform and freeing up the Yuan, but not all the way. And as the Economist points out, that's all they promised to do. Does that constitute a conspiracy ? You wouldn't have though so in normal circumstances, but the way things are now ? In election year ? The accusers won't be quiet for long.....