What does it mean for the RMB to “crack 7”?
• The RMB closed above 7 to the dollar today for the first time since before the financial crisis in 2008, and that was part of the currency’s steady appreciation path since July 2005. This is mainly about political signaling, and reflects the fact that Beijing has very few tools with which to respond to pressure from Washington.
• Under normal conditions I would say that while Beijing might want to signal its displeasure with US policies one or two more times, the PBoC is unlikely to take this much further. A weaker RMB does little to boost domestic growth, and in fact by reducing the household share of GDP in favor of the tradable goods sector, it actually increases China’s reliance for growth on non-productive investment and soaring debt.
• It also is likely to anger trade partners generally, and not just the US, and this risks worsening the global trade environment, something that would hurt China more. Finally, it runs the risk of unleashing a new wave of capital flight.
• But given rising and very worrying tensions in Hong Kong, not to mention the political fall-out from two brutal shootings in El Paso and Dayton, both Xi Jinping and Donald Trump may find an intensification of trade conflict a welcome diversion.
• Meanwhile the data for bilateral trade during the first six months of 2019 suggest just how ineffective tariffs are likely to be in repairing the US trade imbalance.
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