The author is a former U.S. Treasury official and U.S. Chairman of the Forum of Official Monetary and Financial Institutions.
Tensions between the United States and China are palpable. Washington is full of Chinese hawks and the claws will increase with the Trump 2.0 administration. Likewise, Beijing is hardening its position towards the United States. Yet the economic and financial destinies of the two countries, which represent more than 40 percent of global GDP, are linked. Decoupling is not impossible.
Currency squabbles have long been a staple of U.S.-China relations. They reached their height in the United States before the 2008-2009 global financial crisis, when China ran a current account surplus of 10 percent of GDP and reserves soared thanks to massive intervention and a currency constantly undervalued.
After the financial crisis, while its current account surplus shrank sharply, Beijing continued to accumulate reserves, reaching $4,000 billion. After a period of economic weakness and growth fears in 2015-2016 led China to sell $1 trillion in reserves to support the renminbi, tensions temporarily eased. But under Donald Trump in his first term as president, the U.S. Treasury in 2019 designated China, a currency manipulator after the depreciation of the renminbi.
The dollar is now strong across the board. This is largely a “Made in the USA” story, reflecting the strength of the U.S. economy, a relatively slower prospective pace of interest rate cuts, tariff threats and likely fiscal action that will prolong the already huge US deficit and the supply of Treasuries hitting the market, pushing it higher. longer-term rates.
The Trump team believes the dollar is overvalued, as evidenced by its staunch support for devaluation. The reality is that their aspirations run counter to Trump 2.0's likely macroeconomic and trade policies.
China is also concerned about a further weakening of the renminbi against the dollar. Such a depreciation could threaten to trigger severe pressures on the capital account, reminding authorities of those of 2015-2016, an experience they do not want to see repeated. A weakening of the renminbi could limit the central bank's ability to further ease monetary policy in the face of the crisis. China's current deflationary pressures and its deep-rooted economic malaise. At the same time, officials acknowledge that Chinese exports have little need to improve competitiveness: the real trade-weighted renminbi has fallen by almost 15 percent over the past three years. Export volumes are up sharply.
Overall, I think China and the US want a stronger renminbi relative to the dollar. As a result, China and the United States could undertake a joint currency operation. They could release a statement announcing the operation. At that point, China's central bank, which has avoided direct intervention for years, would visibly enter Asian markets on its own behalf by selling dollars and buying renminbis. While Beijing would take care of most of the intervention, Washington could continue the operation in China. London and New York.
Would such a project work? This would certainly not address the underlying drivers of macroeconomic policy and the different cyclical positions in the United States and China. Foreign exchange market intervention in major floating currencies is largely ineffective unless it is massive and repeated and/or signals a change in underlying policies.
But Chinese authorities maintain significant control over the renminbi in foreign exchange markets. This reality and the effect of an announcement could have a powerful impact on the exchange rate and market psychology. One might wonder whether the impact would last, but it would have to be seen.
The depreciation of the renminbi would offset the impact of any significant U.S. tariffs on Chinese goods. On the other hand, the assessment should limit the need for customs tariffs. Interestingly, the United States would acquire renminbi and may then need to hold reserves in that currency.
Such an operation is far from the fanciful discussions about a Mar-a-Lago agreement, modeled on the Plaza agreement, based on the coordination and intervention of macroeconomic policies. This might work in a financial crisis, but not when cyclical conditions vary. For example, Trump will hardly give up extending his 2017 tax cuts to reduce US budget deficits and China will not raise interest rates to support the renminbi.
But despite bilateral tensions, Washington and Beijing have common economic and financial interests. Pondering this idea could help promote some cooperation between the Trump team and Chinese leaders and serve their mutual interests.
