So much for a US-China trade deal. Last week, reacting to Donald Trump’s threat of a fresh round of tariffs, China’s central bank let the yuan depreciate below seven to the US dollar—a symbolically important threshold that the currency hasn’t breached since 2008. Trump’s Treasury department responded with its own historical break: having avoided doing so for 15 years, it dubbed China a currency manipulator (despite that, by its own definitions, China hasn’t been for at least the last five years).
It will be hard to patch things up any time soon, quite possibly until after the 2020 presidential elections. What does all this mean? In most immediate terms, it might be a bit of a wash. The yuan’s weakening might offset the impact of Trump’s new round of tariffs. Neither will this do any favors for the US or Chinese economies. (Not that Trump need care; the Fed’s willingness to lower rates if the economy slows and the global picture worsens lets Trump inflict economic self-harm for political gain.)
But graver risks loom. The possibility of more yuan weakening could push Chinese investors to sell while they can—which could tighten liquidity at an inconvenient time for China’s financial system (its third bank since May just got rescued). And for the US? Markets don’t like the uncertainty. But the bigger concern might be Trump’s whims. If his tariffs go through in September, a further move to pressure Beijing could push the stakes vastly higher than anything we’ve seen yet. And Trump’s recent talking down of the dollar adds another wrinkle to the story.
Join me and Quartz global finance and economics editor Jason Karaian to discuss the risks of a global currency war.
We’ll meet at our usual online location at 11am EDT/4pm BST tomorrow, August 14. You can also reach us at the following numbers:
- UK 0800 014 8469
- USA 866 226 4650
For all numbers, the access code is 722 994 440.
See you soon,