As Trump Meets Liu He, Let’s Talk About That ‘Stable Yuan Pledge’ Again

Donald Trump will meet with Chinese Vice Premier Liu He on Friday at 2:30 (so, about an hour after Trump wakes up) and the face time is supposed to be a sign of how much “progress” was made during trade negotiations this week in Washington.

Of course it’s really just a photo op for Trump and please don’t let it be lost on you that this is the second such photo op with Liu in the past three weeks. Trump sat across from the Vice Premier on January 31 in the Oval Office and for anyone who might have missed that spectacle, here is how Trump kicked things off (and before anybody accuses me of altering this quote in the interest of lampooning Trump, do note that this is from the official transcript produced by the White House):

THE PRESIDENT:  Thank you very much.  It’s a great honor to have the Vice Premier of China with us, and also the Vice Minister of Trade of China.  We have had long discussions.  This has been going on for quite some time.  It will be, by far, if it happens, the biggest deal ever made – not only the biggest trade deal ever made.  It will be the biggest trade deal by far, but it’ll also be the biggest deal ever made.  The two largest countries doing a trade deal.  There won’t be anything that will match that.  And we’ll see what happens.

Yes, “we’ll see what happens.” Although one thing that surely “happened” after that meeting was Liu calling Xi on a secure Huawei device and reiterating that America’s commander in chief seems to be descending further into debilitating dementia by the week.

During that same January 31 event, Trump went on to read a letter from Xi which was quite clearly designed to flatter the US president and sounded like it was written as though intended for a small child – probably because it was.

In any event, Friday’s meeting will be a dubious sequel to those absurd proceedings and the latest pow wow between Trump and Liu comes amid talk of multiple MOUs that will apparently serve as the centerpiece for an eventual meeting between the US president and Xi Jinping.

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Different Day, Same Set Of Hopelessly Entangled Narratives

The going assumption is still that the March 1 deadline beyond which tariffs on $200 billion in Chinese goods are set to more than double to 25% will be extended in light of ongoing discussions and the improving prospects for a “real deal” (as Trump calls it).

Part of any such “real deal” will reportedly be a stable yuan pledge, something we discussed at length on Tuesday when Bloomberg reported that the issue is still front and center for the US.

That will sound great on the campaign trail where a sweating, orange-faced Trump will literally screech at a crowd of rabid, obese rednecks about the time he “solved” “illegal” Chinese currency “manipulation”, but as we detailed exhaustively on Tuesday, it’s not entirely clear what the point of the currency pledge actually is. Additionally, it’s still not clear that the administration fully grasps their own role in facilitating the rapid weakening in the yuan last summer.

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As US Demands Yuan Stability In Trade Talks, Let’s Go Insane Again

“The US is asking China to keep the value of the yuan stable as part of trade negotiations”, SocGen’s Kit Juckes wrote earlier this week, adding that “‘stable’ means more than one thing in FX, of course (are they talking USD/CNY or the trade-weighted yuan, for starters?) but the irony of asking China not to let its currency float (or sink) freely after years of examining whether they are currency manipulators, is wonderful.”

Yes, it is indeed “wonderful”, and also serves as just another reminder that irony and satire are not only dead, but also buried in the Trump era.

One of the things we noted in the linked post above is that a pledge for currency stability is generally consistent with what China wants anyway, so this is a substance-less addition to any MOU. Here’s Goldman with a quick recap:

On the other side of the table, China has engaged in a long series of reforms to make its currency more market-determined, and in recent years has guided that it will keep CNY “basically stable around a reasonable and balanced level” against a basket of currencies. Shortly after China began to emphasise the currency basket, then-PBoC Governor Zhou said “our aim is to have the exchange rate broadly stable at an adaptive and equilibrium level.” More recently, following the announcement of US tariffs, Chinese policymakers have repeatedly said they would not use the exchange rate as a policy tool (and said so again this week), and argued that one-way devaluation would “do more harm than good.” It is therefore not clear that a pledge to maintain currency stability would be significantly different from China’s current FX policy. Moreover, we are sceptical that China would make any material changes in this area given that policymakers have made it a priority to move away from the days of the Dollar peg.

Right. And on top of all that, we would again note that China took a series of steps last August to put the brakes on currency depreciation, despite the fact that the yuan’s weakness at the time was arguably attributable not to “manipulation” in the service of offsetting the tariffs, but rather to market expectations tied to the expected impact of those tariffs on the Chinese economy and also to hawkish Fed policy.

In other words: yes, the depreciation helped cushion the blow from the tariffs, but no, it was not being orchestrated by the PBoC, unless not intervening to stop the slide counts as “manipulation.” The four right-most green circles in the following chart represent the concerted effort on Beijing’s part to stop the yuan from weakening past the psychologically important 7-handle last August.

Goldman reinforces this in the same Friday note cited above. “The US administration remains focused on currency issues (not just with China), and China has appeared to try to ‘put its best foot forward’ by leaning against depreciation pressures”, the bank writes, referencing the chart below which is just the CFETS basket plotted with the CCAF.

(Goldman)

“When President Trump expressed displeasure that CNY was ‘dropping like a rock’ last summer, officials intervened both with public comments and a heavier hand on the fixing mechanism”, the bank adds, referencing the same set of measures documented in our annotated chart above.

Still, there’s only so much China can be expected to tolerate when it comes to currency appreciation at a time when trade tensions are weighing on the economy. Authorities aren’t going to be willing to stomach a scenario where yuan appreciation ends up materially undermining already decelerating exports, especially if they view that deceleration as being the product of an unfair (and possibly illegal) approach to trade by the Trump administration.

So, it’s all about how much economic uncertainty would be removed in the event of a resolution to the Sino-US dispute. If the removal of uncertainty combined with policy easing is enough to resurrect the economy, well then some further CNY appreciation would be tolerable. If not, not.

Finally, if you’re looking to point fingers at anyone for currency “manipulation” in the interest of increasing trade competitiveness, you might want to point your finger at the guy who is i) demanding his central bank cut rates when unemployment is near a five-decade low, ii) shrieking on Twitter about how the dollar is too strong and iii) implementing a weak dollar policy by proxy in various trade agreements.