China US

From October 10th to 11th, the China-US trade high-level negotiations restarted after a few months of deadlock.

The outcome of the negotiations seems to exceed the expectations of the outside world. US President Donald Trump met with Chinese Vice Premier and negotiator Liu He, and immediately decided to suspend the tax rate on Chinese goods worth 250 billion to 30%. This is the tariff measure originally scheduled to take effect on October 15.

According to information disclosed by the Chinese authorities, the two sides have made substantial progress in the fields of agriculture, intellectual property protection, exchange rates, financial services, expanding trade cooperation, technology transfer, and dispute settlement. Trump said that China and the United States have achieved “substantially substantial.” The first phase of the agreement, and said that it is possible to meet with President Xi Jinping of Chile and China next month and sign the final document.

New progress, the exchange rate agreement is focused

Among the contents of the “substantial progress” reached in this negotiation, exchange rates and financial services were mentioned for the first time. US Treasury Secretary Steve Mnuchin said after the meeting that the talks were “almost completed” and said that once the China-US first-stage trade agreement is completed, he will cancel the US exchange rate manipulative country label against China.

Obviously, the exchange rate is a major theme of this China-US negotiation and is likely to be reflected in this first phase agreement. Although the specific content is not disclosed yet, Mnuchin has been demanding to increase the market transparency of the Chinese central bank’s intervention in the renminbi and maintain the stability of the renminbi against the US dollar. The purpose of the US side to include the exchange rate in the trade agreement is that it hopes that the renminbi will appreciate against the dollar, thereby promoting US exports and reducing the trade deficit.

In August this year, the United States imposed tariff escalation measures on China again. At the end of August, the RMB exchange rate was “broken 7” for the first time. Trump angered that China “manipulated the exchange rate” and the US Treasury immediately listed China as a currency manipulation. This is the first time in 25 years.

The trade war began with Trump’s dissatisfaction with the China-US trade deficit. Trump also repeatedly said that the US dollar was too strong and attacked the Fed’s monetary policy. How will the upcoming exchange rate agreement affect the future RMB and the US dollar?

The Square Agreement is unlikely to happen

Speaking of the exchange rate agreement, the external reference is first of all the “Plaza Agreement” signed by the United States and Japan in the 1980s. After the signing of the agreement, the five developed countries including the United States, Britain, France and West Germany jointly intervened in the foreign exchange market, resulting in the continued depreciation of the US dollar, and the Japanese economy began to “lost thirty years.”

Since the China-US trade war began, the US-Japan trade war has been the most commonly used analogy. The current US negotiating leader, the White House trade representative, Robert Lighthizer, was indeed the leader of negotiations with Japan. However, the signing of the exchange rate agreement between China and the United States cannot be the second “Plaza Agreement.”

A few years after the signing of the “Plaza Agreement”, the yen has appreciated by 260% against the US dollar in the late 1980s. The sharp appreciation has made Japan’s financial asset bubble frantically accumulate. The stock market and the housing market have prospered. The Japanese once said “to put When Tokyo sells, it can buy the whole of the United States, but the economy is thus turned from real to virtual and eventually collapses.

In the process, the appreciation of the yen was out of control, which was under pressure from the United States. At the same time, the Japanese government’s mistakes in opening a monetary easing policy, combined with the US-Japan trade war, dampened the competitiveness of Japanese companies and caused a recession. At that time, the Japanese economy was extremely dependent on exports, especially on US exports, and Japan’s industrial structure was relatively single. Japan is limited by its own strength, and there is no room for bargaining with the United States in signing the “Plaza Agreement.”

Looking back at China today, neither the economy nor the economic structure is Japan 30 years ago. China not only has a relatively complete industrial chain, but also the economy is driven by domestic demand, the market is huge, and the international balance of payments is stable. The China-US exchange rate agreement is likely to allow the renminbi to appreciate, but it is unlikely to be out of control as in Japan.

Beijing is pleased to see a modest appreciation of the renminbi

From another perspective, if the renminbi appreciates moderately after the China-US exchange rate agreement, it may help the internationalization of the renminbi, which is the strategic direction of Beijing in terms of currency.

When the RMB exchange rate was “broken 7”, there was immediate concern that China’s capital outflows would intensify. If the renminbi appreciates on the current basis, it will further increase its attractiveness as a foreign exchange. After experiencing the exchange reform in 2015, it has recently experienced the reform of the loan market quotation rate (LPR), and the renminbi is entering marketization and internationalization in a step-by-step manner.

At present, the proportion of the renminbi in the global currency reserve is less than 2%, and a small appreciation may stimulate and accelerate this proportion of growth. This means letting more economies believe in the ability of the renminbi to maintain value, thereby increasing the renminbi’s share of the currency reserve. If this agreement finally allows the renminbi to appreciate moderately, it is the result of Beijing’s pleasure.

 

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