China's "Currency Manipulation"—A Sign of Panic or a Cunning Plan?

Over the past several months, there has been hype about the prospect of the Chinese renminbi (RMB) weakening past 7 per U.S. dollar, despite no evidence that 7 is a magical number. China's central bank, People's Bank of China (PBOC), had denied that it was focused on defending 7, and the IMF said it wasn't significant. So when the RMB finally broke 7, the media treated it as a dramatic event, but I believe, this will soon pass.

It is likely that the timing of the move was deliberate, following President Trump's latest round of tariffs last week.

A sign of panic?

In a Monday morning tweet, President Trump responded to a depreciating Chinese renminbi by stating, “It's called 'currency manipulation.' ”

The decision to tag China as a currency manipulator was either a sign of panic, or a cunning plan. Or a bit of both.

My interpretation of yesterday's tweet is that the president still wants to sign a trade deal with Chinese President Xi, because Trump recognizes that a deal is better than no deal for his re-election prospects.

No deal would mean continued taxes on Chinese goods, paid for by American families. (And the next round of tariffs would fall largely on consumer goods, which had previously been spared because of the direct impact on voters.) No deal would mean a continued Chinese boycott of American soybeans, which is contributing to harsh conditions for farmers in politically important states. No deal would mean continued economic uncertainty, which is leading to weaker corporate capex and worries about a recession. Moreover, the prospect of no deal, and an escalation of the tariff dispute into a full-blown trade war, has had a clear, negative impact on investor sentiment.

I believe Trump wants a deal, but is struggling to find a way to close the deal.