By Jen Saarbach & Kristen Kelly, Co-Founders of The Wall Street Skinny
Amidst the rollercoaster of the US’ tariff standoff with China, the Chinese RMB fell to an 18-year low. Some pundits pointed to this as a signal that the US was prevailing in weakening China through its tariff policies, which have yet to be finalized.
And yes, less US investment in China — all else being equal — threatens the strength of its economy, which is still plagued by an ongoing real estate crisis, slowing consumption, and other signs of distress.
But we would caution couching this as a strategic victory for two main reasons.
The Nature of the RMB
First, the RMB is not like most other currencies. It does not freely float against all other currencies, richening or cheapening based on nothing more than the vicissitudes of supply and demand.
Rather, the RMB has a long history of being a managed currency. It was directly pegged to the USD from the mid 1990s to the mid 2000s, before it was revalued and set against a basket of currencies whose weights remain unclear. The price action of the RMB relative to the dollar suggests that basket is quite heavily weighted towards the dollar, and the degree to which China’s central bank has — or hasn’t — intervened in its currency over the past twenty years has been the subject of much criticism.
The current policy has been described as — at best — a “managed float”.
And manipulated or not, China’s export-driven economy has benefited from a weaker currency for decades.
The State of the US Dollar
Secondly, the U.S. Dollar Index (DXY) ALSO fell to a three-year low earlier this week.
Why? These same tariff policies have shaken confidence in US dollar denominated assets, from equities to bonds to the currency itself. If the goal of tariff policies is ultimately for the US to become a manufacturing powerhouse to rival China — and a net exporter, rather than net importer — then this aligns with those objectives.
But US hasn’t changed its spending habits yet. It hasn’t yet had its companies feel the actual impact of tariffs. And it hasn’t built out the manufacturing capability to compete with China yet.
So while a falling RMB of course hurts China to some degree, it also helps keep China’s export economy humming along with its other trading partners.
By contrast, a falling USD arguably hurts the American economy that is still very much consumption and import-based in greater measure.
Furthermore, the dollar weakening in the absence of easing monetary policy is quite concerning. And we think it’s ultimately one of the key reasons that Trump is currently walking back the scope of his tariff threats against China.
So unlike the videos floating around on social media claiming strategic victory, we think if it’s really a race to the bottom with currencies, China may be better positioned to weather a weak currency than the US.