The White House will no doubt accuse Beijing of using its currency as a weapon in the trade war. There is more to the story than that
FREE EXCHANGE rates, argued Milton Friedman in the 1960s, would probably lead to “freer world trade...and a reduction of tariffs”. In China’s case his logic is being turned upside down. The imposition of tariffs is leading to a freer exchange rate. On August 1st President Donald Trump warned that he would soon impose a 10% levy on roughly $300bn-worth of Chinese goods that have not already been hit by the trade war.
For both reasons—to keep the White House mollified and yuan-holders calm—China’s authorities have previously resisted letting the yuan weaken past the big, round number seven. In the second half of 2018, for example, the country’s central bank supported the currency with both word and deed, emphasising the need for stability, buying the yuan offshore and increasing the regulatory cost of speculating against the currency.
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