The Trump Effect: China Makes Big Change in Response to Trump’s Hard Line against Them

Trump and China have developed a rhetoric that many have found frightening. The talks of currency manipulation and reducing trade deficits sound like early shots of a trade war, and such a war could have negative impacts on both countries.

For those who have followed Trump’s career a little more carefully, the purpose of Trump’s words become apparent. He has been leveraging pressure without taking direct action, and that pressure has finally reached Beijing.

Ever working the art of the deal, Trump is already drawing signs of concession from China. They started with a recent announcement on economic policy, and economists everywhere are paying close attention.

The Official Chinese Report

China’s announcement on their economic plan was full of familiar statements, but it was the few, distinct departures from the norm that have brought notice. For the first time in the country’s history, they added a requirement to their agenda that aims to ensure a stable global state for the yuan.

While an official plan on how to achieve that aim is still pending, the general consensus is that the government will reduce how tightly it tries to control the yuan’s value. This will inevitably tie it more closely to the USD, and it will have far-reaching impacts on global currency exchanges.

While the government in Beijing will put on a strong face, this change is no doubt tied to Trump’s firm stance on China’s questionable economic policies in recent years. In fact, the county’s top economist was quoted saying, “Trump is threatening China as a currency manipulator, and we can’t give him evidence.”

Leading up to the Switch

This represents a major change in direction for how China handles currency, and they did not arrive at this point easily. The yuan has been crashing for a little over a year now, hitting decade lows by the end of 2016.

The problems that led to the crash are numerous and complicated, but problems with overproduction, inflated markets and poor economic policy caused the currency to lose roughly 30 percent of its value in 2016 alone.

In response, the government burned through more than $1 trillion of their exchange reserves to inflate the yuan’s value, and it still maintained steady and rapid losses. If the government follows through on their statement to improve global ties, the currency is likely to continue to drop.

External Contributors

While China has sowed many of their current struggles, the political upheaval across the world contributed to the problem. Fed hikes in the U.S. made progress in 2016 and have shown signs of further increases for 2017. This has put pressure on Chinese exchange holdings and has affected international currency rates.

More dramatically, the results of Brexit have hurt the long-term estimations of the Euro, increasing the world’s reliance on the USD as a currency standard. Worse yet for China, Trump’s win eliminated their hopes of continuing their questionable practices while America turns a blind eye.

Even on the campaign trail, Trump was vocal about his criticisms of TPP and Chinese currency manipulation. His status as president only increases pressure on China’s handling of the yuan.

All of that led to China’s current state, but expectations for 2017 heaped even more on the pile. The uncertainty shadowing several major elections in Europe have made investors even more shy around the Euro, and Trump’s stance on several existing international trade deals and commitments cast an additional shadow.

To summarize, the global climate is increasingly favoring investment in the U.S., and international uncertainty is putting China’s economic stability to the test. With major position changes in Beijing happening this year, you can expect that they will need to play nice in order to keep economic collapse from loosening their political power.

What it Means for Us

Domestically, this will have less direct impact than other international changes, but there are a few quick lessons. First, Trump continues to leverage more negotiating power for international trade. If things continue to favor him, you can expect replacements for most major trade agreements to favor U.S. exports. This makes domestic investment promising.

On the flip side, China is an increasingly risky ground for investment. The yuan isn’t likely to rebound any time soon, and Chinese exports may take major hits by the end of the year.

Regards,

Ethan Warrick
Editor
Wealth Authority


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