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The writer is a former US Treasury official and US chair of Official Monetary and Financial Institutions Forum
The tensions between US and China are palpable. Washington is filled with China hawks and talons will sharpen with the Trump 2.0 administration. Likewise, Beijing is hardening its posture against the US. Yet the economic and financial fates of the two nations, accounting for over 40 per cent of global GDP, are intertwined. Decoupling is nary impossible.
Currency feuds have long been a staple of US and China relations. They reached a feverish pitch in the US before the 2008-9 global financial crisis, when China was running a 10 per cent of GDP current account surplus and reserves soared on the back of heavy intervention and a persistently undervalued currency.
Following the financial crisis, when its current account surplus came sharply down, Beijing still continued to amass reserves, reaching $4tn. After a period of economic weakness and growth scares in 2015-16 led China to make $1tn in dollar sales from reserves to prop up the renminbi, tensions temporarily quieted. But under Donald Trump in his first term as president, the US Treasury in 2019 designated China a currency manipulator after renminbi depreciation.
The dollar is now strong across the board. It’s largely a Made in the USA story, reflecting the firm US economy, relatively shallower prospective pace of interest rate cuts, tariff threats and probable fiscal action that will extend the already huge US deficit and supply of Treasuries coming on to the market, pushing up longer-term rates.
Team Trump believes the dollar is overvalued, as shown in its ham-fisted backing for “devaluation”. The reality is that their aspiration flies in the face of Trump 2.0’s likely macroeconomic and trade policies.
China also frets about a further weakening of the renminbi against the dollar. Such depreciation could threaten to trigger sharp capital account pressures, reminding authorities of those in 2015-16, an experience they do not wish to see replicated. A weakening renminbi could limit the ability of the central bank to further ease monetary policy in the face of China’s current deflationary pressures and deep-seated economic malaise. Meanwhile, the authorities recognise that Chinese exports hardly need to gain further competitiveness — the real trade-weighted renminbi fell nearly 15 per cent over the past three years. Export volumes are up strongly.
On balance, I believe China and the US want to see a stronger renminbi against the dollar. Accordingly, China and the US could undertake a joint operation on the currency. They could issue a statement, announcing the operation. At that moment, China’s central bank, which has eschewed direct intervention for years, would visibly enter the Asian markets on its own account with dollar sales/renminbi purchases. While Beijing would undertake the bulk of the intervention, Washington could carry on the operation in London and New York.
Would such a project work? It would surely not tackle the underlying macroeconomic policy drivers and differing cyclical positions in the US and China. Foreign exchange market intervention in major floating currencies is largely ineffective, unless perhaps massive and repeated and/or signalling a change in underlying policies.
But the Chinese authorities retain significant control of the renminbi on foreign exchange markets. That reality and the effect of an announcement could have a potent impact on the exchange rate and market psychology. One might question whether the impact would endure, but that would need to be seen.
Renminbi depreciation would offset the impact of any large US tariffs on Chinese goods. In contrast, appreciation should limit the need for tariffs. Interestingly, the US would acquire renminbi and might then need to hold reserves in the currency.
Such an operation is a far cry from fanciful discussions about a Mar-a-Lago Accord, modelled on the Plaza Accord which was premised on macroeconomic policy co-ordination and intervention. That might work in a financial crisis, but not when cyclical conditions vary. For example, Trump is hardly going to forgo extending his 2017 tax cuts to reduce US fiscal deficits and China isn’t going to hike interest rates to prop up the renminbi.
But despite bilateral tensions, Washington and Beijing have common economic and financial interests. Thinking about the idea could help promote a sliver of co-operation between Team Trump and the Chinese leadership and serve their mutual interests.
