Ever since that seminal day for both US politics and the world at large that Donald Trump first set out on the road to the White House, the subject of underhand actions by Chinese authorities to artificially weaken the Chinese Yuan has been a constant theme. The accusation of Chinese currency manipulation in order to gain an unfair advantage for exporters plays right into wider charges of trade malpractices that prompted the President to slap tariffs on Chinese exports and start down the route towards trade conflict.
Whether one agrees with Mr Trump's methods or not, it's pretty indisputable that a good number of the allegations that he levels against Beijing hold water ..... and in the past, currency manipulation would undoubtedly have been one of them. Not recently however, despite what the President and his close circle may say .... and that's according to the arm of the US Treasury specifically dedicated to monitoring such things. Of course, minor details such as whether there's actually been any manipulation or not is not the kind of thing to bother anyone in the Trump camp too much, but more to the point they're calling for Beijing to guarantee currency stability as part of any trade deal.
Presumably much of the White House's current displeasure is a result of the Dollar's climb against the Yuan last year, with USD/CNY moving from a low of about 6.27 to just shy of 7.00. But that ignores the fact that the Dollar appreciated that much across almost all currencies -- the Yuan was not particularly weak and anyway Beijing argues that they measure its value against a trade-weighted basket of currencies and not just the US unit. Dollar strength was the result of the US administration's aggressive stimulus package of tax-cutting and infrastructure spending. Such stimulus has been successful (in the short-term, at any rate) in achieving three of its main goals : a high rate of growth, falling unemployment and a rise in stock market prices that Mr Trump believes his presidency should be measured by. However he refuses to make the link between those happier outcomes and their less welcome consequences -- higher rates and a stronger dollar. Someone else must take the blame for those : The US Federal Reserve of course, and in this case China.
Actually, at USD/CNY 6.71 the Yuan has strengthened 3% since November and, the WSJ argues, the stability of the Yuan is based more on more tangible economic trends and fundamentals than any perception that we are moving closer to a trade deal. It's unlikely that Beijing would agree to any long-term commitment to bolster the Yuan, and that may prove troublesome when it comes to closing that trade agreement. But if Mr Trump lets the dice roll then the WSJ argues that action by Chinese authories would not even be required -- those market and economic trends would continue to maintain the Yuan's stability without any costly intervention by China's central bank.
Sometimes the full effects of a policy can be hard to forecast. The drop in the level of Chinese exports could be taken as a sign that US tariffs are having the desired effect, but in trade balance terms it's the much sharper drop in imports -- caused by weakening demand in China and by cheaper oil prices -- that is more relevant. There's always an obvious irony when domestic weakness that causes imports to fall more than exports props up the trade balance which in turn supports the currency.
Also acting in favour of the Yuan is the US Fed's newly doveish, or at least more cautious, stance -- something that will be pleasing the President on a number of levels. Until pretty late last year, the Fed was embarked on a course of regular rate rises that looked likely to continue throughout 2019, 10yr Treasuries were yielding above 3% and according to some were heading to the sky (trading today at 2.58% ! ) and the premium one received for purchasing their Chinese equivalent was a feeble 25 basis points. Now, rate rises by the Fed are on hold and the premium of China's 10yr paper over Treasuries has doubled ..... all of which supports the Yuan.
So too does the level of Chna's foreign exchange reserves, which have recovered after a fall last year, and data showing that net foreign exchange sales by Chinese banks have dried up indicates that there is very little capital outflow pressure. Sounds like the Yuan looks pretty solid, doesn't it ? So what might be the fly-in-the-ointment ?
Here's one possibility : the housing market. In late 2014, a property crash prompted the central bank (PoBC) to ease aggressively and that brought on heavy capital outflows in 2015. To compound the problem, the easing cycle fuelled a huge stock market bubble .... and when that burst we saw even more in the way of capital outlows. Right now, China's property market is once again weakening and stocks are on the effervescent side if not yet obviously bubbly. As the WSJ says, there are reasons to believe that another property dump will be less destructive than the last one, but if it should happen the PBoC will surely wade in with aggressive easing measures :
Cue : more capital outflows
Cue : a weaker Yuan
Cue : a very irate Donald Trump.