The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

China Rebounding

10/08/2020

Since signing the agreement to a ceasefire in the trade war with China, that trade war has been crowded off the front page by the election, but interesting things are still happening.

Despite a long-established reputation as a currency manipulator (in order to make their exports cheaper for foreigners to buy), they have actually allowed their currency (Yuan) to appreciate or go up by 3.9% since June.  This is a huge move, the largest in twelve years.  Things imported from China now cost more.

One reason is that China has significantly higher interest rates than the U.S.  In order to take advantage of those higher rates, it is necessary to sell your dollars to buy the Yuan.  This drives down the dollar and drives up the Yuan.  Their economy doesn’t need super-low interest rates, like the U.S. economy does.

The other reason is that since China stamped out the coronavirus with aggressive shutdowns, their economy has performed remarkably, with stronger-than-expected growth.  Believe it or not, their trade surplus with the U.S. has actually increased!  Our trade deficit with China has gotten worse.

This does not mean the trade war was just an unnecessary risk.  It helped many of our farmers.  Also, it put China on notice that its patently unfair trade practices are becoming an increasing problem and is deeply resented by ALL of its trading partners.  This will continue to be a story for many years.

Over the long-term, my biggest concern is that China may further strengthen its parallel universe or a separate internet, where all information is fully censored by the government, and may require its weaker trading partners to adopt it.

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