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Trumping the Renminbi

HONG KONG – At the recently concluded World Economic Forum Annual Meeting in Davos, Switzerland, Chinese President Xi Jinping mounted a robust defense of globalization, reaffirming his country’s “open door” policy and pledging never to seek to start a trade war or to benefit from devaluation of its currency. Soon after, US President Donald Trump, in his inaugural address, effectively made the opposite pledge: using the word “protect” seven times, he confirmed that his “America first” doctrine means protectionism.

Trump speaks of the United States as an economy in decline that must be revitalized. But the reality is that the US economy has been performing rather well in the last two years. Its recovery has outpaced that of other advanced economies; job creation has been impressive; and the dollar has been strong.

The dollar’s value has risen particularly high in the last few months, as Trump’s promises to increase government spending, lower business taxes, and cut regulation have inspired a flight to quality by investors. By contrast, the Chinese renminbi has weakened significantly – from CN¥6.2 per dollar at the end of 2014 to CN¥6.95 at the end of last year – owing largely to declining investment and exports.

Trump has accused China of intentionally devaluing the renminbi, in order to boost its export competitiveness. But the truth is quite the opposite: in the face of strong downward pressure on the renminbi, China has sought to keep the renminbi-dollar exchange rate relatively stable, – an effort that has contributed to a decline of more than $1 trillion in official foreign-currency reserves.