MNI: China Won't Make Japan's Mistake With FX Deal- Advisors

China is unlikely to yield to any U.S. calls for a significant appreciation of the yuan, which would hit its exports and sap its economy, policy advisors told MNI, pointing to the example of Japan’s long deflation in the wake of the 1985 Plaza Accord.

While China would be willing to discuss enhancing the two-way flexibility of the yuan, artificially engineering a stronger currency would be very damaging, an advisor to the People’s Bank of China and the Chinese government said.

“Any unilateral appreciation detached from economic fundamentals is unacceptable,” he said, noting that China would refuse to participate in a “Mar-a-Lago Accord” designed to boost U.S. competitiveness. If the U.S. closes itself off to Chinese exports, the country would have less use for U.S. dollar assets including Treasury bonds, he noted. (See MNI INTERVIEW: Yuan To Emerge As Regional Reserve Currency)

It was the Plaza Accord, designed to push the yen higher, which triggered a shift in the focus of Japan’s economy from real to speculative activities, leading to the formation and collapse of stock and real estate bubbles, advisors noted.

They said that, if implemented, a “Mar-a-Lago Accord” would profoundly disrupt the global currency system.

YUAN, RARE EARTHS

The past weekend’s U.S.-China negotiations, which led to the lifting of 91% of the tariffs on each other’s goods announced under President Donald Trump and a 90-day suspension of another 24%, did not touch on currency, according to U.S. Trade Representative Jamieson Greer on Monday, though he added that the U.S had noted to China that currency levels were a factor behind the U.S. trade deficit.

A former official familiar with China’s trade policy said that while Beijing will make no significant concessions on the yuan and rare earths in upcoming talks with the U.S., Chinese officials could discuss the subject of purchases of U.S. Treasury bonds, given that market’s stabilisation.

He said that maintaining relative stability in the yuan-dollar pair is critical for China, in order to hedge against future uncertainties. As the country’s trade surplus is expected to narrow, a steady exchange rate helps stabilise cross-border capital flows and enables a controlled depreciation against a basket of currencies as the dollar weakens, thereby boosting export competitiveness and supporting economic growth, he continued.

The People’s Bank of China should ensure that the positive signal to investors sent by the resumption of China-U.S. trade talks does not push up the yuan sharply, the former official added. (See MNI INTERVIEW: Chinese Firms Should Hedge Dollar Risk-Guan Tao)

ROLE OF THE DOLLAR

Despite the success of the weekend’s talks, China still finds itself compelled to adopt alternative risk-diversification strategies, such as boosting domestic demand to reduce reliance on the dollar, while accelerating the yuan’s integration into trade settlements, overseas investment, and domestic consumption, the advisor said. 

“This is an unavoidable necessity,” the economist said, “when the dollar ceases to be a safe asset, we must build new alternatives.” 

Only by cultivating its enormous domestic market and fostering demand-driven commercial ecosystems can China sustainably internationalise the yuan, break free from dollar hegemony, and reclaim monetary policy independence, he said, adding that this shift will be critical to avoiding systemic vulnerability to U.S. financial coercion.

However, an economist close to U.S policy makers told MNI that in the long run China may have to revalue the yuan in order to bolster domestic demand. While this would erode China's export competitiveness, the world’s willingness to accept a big Chinese trade surplus has probably run its course anyway, he said, noting that to do the opposite and allow the yuan to depreciate in the face of U.S. tariffs would hit other countries which are also facing Washington’s levies as well.