On Tuesday, August 11, China began devaluing its currency unit, the yuan, against the U.S. dollar. Later that day, Republican presidential candidate Donald Trump denounced China, saying:
“I think you have to do something to rein in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything.”
For a candidate whose pitch is based upon being smarter than everyone else, Trump has taken a spectacularly stupid position with respect to China—not just economically, but politically. After all, it was less than three years ago that Mitt Romney threw away his chance to win the 2012 election by running TV ads in Ohio accusing China of “currency manipulation”. The electorate did not buy monetary mercantilism then, and they would not buy it today.
Here is what there is to understand about China’s currency move. Last week, China began manipulating the yuan in the same way that The Donald would manipulate his Mercedes on a winding mountain road in order to avoid following the car in front of him off a cliff. The People’s Bank of China (PBC) simply did its basic job: it moved to keep the real value of the yuan (approximately) stable.
During the last four days of last week, the value of the dollar rose by 2.26% against the CRB Index*, while the yuan fell by 2.84% against the dollar. The net result was that the real value of the yuan fell by 0.64%. This amounts to a rounding error, not a currency war.
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