Donald Trump is not known for letting facts get in the way of a good election argument.
This is certainly true of the potshots that he is taking at Chinese exchange rate policy, potshots he bases on the erroneous premise that the Chinese currency remains between 15 and 40% undervalued. This leads Mr. Trump to policy recommendations that, if implemented, would be highly damaging to both the US and the global economies.
Republican presidential candidate Donald Trump greets supporters in Springfield, Illinois, November 9, 2015. Reuters.
It seems to have escaped Mr. Trump’s notice that, while the Chinese currency might have been undervalued in 2008, this is no longer the case today. Since 2010, the US Treasury estimates that the Chinese currency has appreciated in real effective terms by around 30%. It has done so at a time when other currencies like the Japanese yen and the Euro have experienced major depreciations while the Bank of Japan and the European Central bank have engaged in money printing binges. As a result, the International Monetary Fund now considers that the Chinese currency is at approximately its fair value.
A further indication that China’s currency is no longer undervalued is the major turnaround in its trade performance. Whereas in 2010 China had an external current account surplus of around 10% of GDP, over the past few years, as a result of the large appreciation in the Chinese yuan, that surplus has declined to barely 3% of GDP. In addition, the most recent Chinese trade numbers are indicating that China is experiencing a major decline in its exports — hardly an indication of an undervalued currency.
Most troubling yet is that Mr. Trump seems to be oblivious to the fact that capital is now fleeing China at an alarming rate, as Chinese domestic residents have growing doubts about the country’s future direction. According to US Treasury estimates, those outflows have totaled a staggering US$500 billion in the first nine months of this year.
If the Chinese were now to refrain from currency market intervention as Mr. Trump is demanding, there can be little doubt that there would be a major Chinese currency depreciation. There would be nothing then to stop capital outflows from putting strong downward pressure on the currency. In the context of money printing in Japan and Europe, any sharp depreciation of the Chinese currency would risk triggering a global currency war.
It is very doubtful that this is what Mr. Trump really wants for the United States. But why let such considerations get in the way of China-bashing when such bashing could score points in an election race?
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