China's Currency Manipulation Is The Key To A Trade Deal

May 15, 2019

There are reasons why notorious China bear Kyle Bass decided to relinquish his long-running yuan short. For one thing, there could be an anticipatory reaction that Donald Trump may just pull off a miracle and solidify a trade deal with China. Everyone knows now that Trump's self worth and his own identification is based on the stock market. Whether it goes up or down, he always has something to say on Twitter. 


I think the US trade negotiators are firmly set on their ways that they will not tolerate China's currency manipulation tactic. Even though the US manipulates their own currency, the drawing conclusion is that they do it less. If a trade deal fails to come into fruition, not only will China be at risk of depleting their foreign exchange reserves, they will also have to use their domestic currency to prop up their own exchange market. 


The United States is dominated by institutional money managers and big banks that offer stability when stock markets depreciate. Of course, if things get too drastic, all American corporations and banks have to do is scream at the Fed chair to lower interest rates or at least provide more liquidity. 


Indeed, the strongest economic power in the world is the United States. Not only do they dominate in international trade, but their own rules allow them to establish stability that benefits their allies and hurts their enemies. The US trade deficit boils down to a lack of reserves, a growing financial deficit, and over-consumption. Despite this, the US is exploiting the expanding deficit and acquiring massive capital at low prices though the recycling of the US dollars, the main safe haven currency and baseline currency of payment in global trade. 


Whether or not Donald Trump likes it or not, US technological companies are globalized entities and their main menu is to generate profits from every country on the globe. If the world economy is based on a global value chain, then this chain also reflects the automotive industry, semiconductors, energy, and agriculture sectors that are prevalent for the global world to sustain itself towards stability. Without stability you're left with outcomes such as those in the Middle East.


America enjoys low commodity prices. The central banks of our world have been working hard to combat inflation, whereas the US has always steadily kept it below 2 percent. The reason they've been able to attain this so easily is due to cost-efficient products coming from China. The restructuring of American manufacturing jobs is simply based on productivity. Computers, robotics, and machinery have become the economic driver of well paying jobs rather than the stagnant wages that characterized the past. 


Xi Jinping stated, "Various civilizations are not destined to clash. It is foolish to believe that one's race and civilization are superior to others, it is disastrous to willfully reshape or even replace other civilizations. Asians expect a peaceful, stable, open and integrated continent with common prosperity." 


There are significant reasons why Xi Jinping reneged on the progress of the trade deal. His neck was on the line with his own hardcore party that believed that no laws should be dictated by another country. Indeed, Trump has a good relationship with Xi, however the real dilemma is the possibility of China's Central Command getting rid of Xi. If that happens, a more hawkish and more determined China will rise quicker than anticipated. 


The anticipatory reaction is that Trump has a fulfillment to make a trade deal with China. Trump indicated that everything will be fine and dandy in a month or two. Trade deals, especially with China, are based on the Yin and Yang philosophy that everything exists as polar opposites. Neither country is superior to the other. Yes, Trump has an option to kick in tariffs for another $300 billion worth of goods. Ultimately, he may use that as leverage in solidifying a trade deal. 


The real scenario is this. If Trump does attack China with tariffs, then the US market will take a huge hit. When asset prices get so low that corporations start to fret, then investors will have a hard time in ascertaining value as prices continue to drop. Trump wants to get reelected again, and if he's able to establish a binding agreement with China on currency manipulation, then you can argue that China's currency will be on course for a significant appreciation. This is quite easy for China to do. I just think Trump's negotiators have something to go for in not only outlining technological threats, but mapping China's currency so that the Chinese Renminbi can not be manipulated against the United States. Trump knows the stock market can't go down, it's what he lives for and believes his reputation is based upon. 

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