OK, Tell Me More?
Over the last few months, the media has been littered with articles covering the trade war between China and the US. Recently, Donald Trump has been calling China out for manipulating its currency, the yuan (CNY).
Let’s imagine you get $1 for CNY1. So, a widget costing CNY1 costs a US company $1. With a 10% tariff tacked on, that same widget now costs the US company CNY1.10, meaning the US company may end up buying less. To avoid this, the Chinese can devalue their currency so that now CNY1.10 gets you $1. The US importer now ends up back at square one paying $1 for the item. The tariffs would have limited to no effect.
Are The Chinese Doing This?
Their authorities have come out and said they are not using their currency as a weapon in this trade war and instead are letting market forces decide what the exchange rate is. Recent weakness in the yuan has Trump blowing his horn on manipulation, but this weakness may just be in response to the trade war and a slowing economy in China.