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China's currency fell to an eight-year low against the U.S. dollar Tuesday as investors pulled cash from various emerging markets amid a surge in Treasury bond yields in a move that could revive a potentially damaging campaign promise from President-elect Donald Trump.
China's yuan trades within a tight 2% band against the greenback set each day by the People's Bank of China, which makes no secret of its desire to manage the currency's value in international foreign exchange markets. Earlier Tuesday, the yuan drifted to 6.86 against the dollar, extending its full-year decline to 5% and to the lowest level since December 2008.
Perhaps sensing the sensitivity of the move in the context of last week's U.S. elections, China's official Xinhua News Agency published a report that the country's President, Xi Jinping, had urged Trump in a late Monday telephone call for a meeting between the two leaders at "the earliest date" and vowed to maintain close contact in the months ahead.
Trump has repeatedly accused China during his campaign of keeping the yuan artificially low in order to boost exports and has said he'll officially label the country as a currency manipulator on the day he takes office.
"We can't continue to allow China to rape our country, and that's what they're doing," he told a rally in Indiana earlier this spring, a message that clearly resonated with mid-western workers who feel that China's massive trade surplus has resulted in what Trump has described as "the theft of American jobs."
The weaker yuan, however, hasn't really been a boost to China's overseas trade, with data released last week showing exports fell for the seventh consecutive month. China's October shipments directly to the U.S. fell 5.6%, the country's statistics office said, against a 6.9% decline in U.S. imports. In fact, China's U.S. trade surplus so far this year -- $208 billion -- is down 4.7% from the same 10-month period last year.
The complexity of U.S-China relations, however, likely means that Trump won't push for its most important trading partner to be labelled a currency manipulator in the near-term, owing in part to that country's genuine efforts to allow the yuan to move more freely in global foreign exchange markets.
In the 10 years after removing the so-called "hard peg" June 2005, the yuan has increased by more than 36% against the dollar, and, in the past year, has also risen more sharply against non-dollar currencies as China expands its export reach and the greenback accelerates in advance of signalled interest rate increases from the Federal Reserve.
China is also burning through its (admittedly) titanic pile of foreign exchange reserves in the process, the bulk of which are dollars, in order to keep the yuan tethered to its 2% range. Over the past three months, China's reserves have fallen by around $50 billion as part of that effort, and although it still has access to $3.166 trillion more, the level is the lowest since 2011.
But while Trump may highlight the fact that China is "killing us" on trade, and costing American jobs in the process, it's hard to ignore the tangential benefits of a strong dollar and a weaker yuan on the world's largest economy. The U.S. Commerce Department said Tuesday that headline retail sales were up 0.8% from last month amid the fastest pace of car and light truck sales in nearly a year.
With consumer spending responsible for around two-thirds of U.S. economic output, it would take a brave president indeed to challenge the source of most of those products (75% of all cell phones; 93% of tablets and laptops, for example) with a promised 45% import tariff that would drive their value up by at least 10%.
At the same time, it could be even more difficult for a divisive president to ignore a key cornerstone of his electoral platform and continue along with "business as usual" path with a country that many see as the principal rival to American economic dominance.
However, much like the infamous Mexican border wall, Trump's rhetoric has erected a complicated barrier between the United States and its most important trade partner that can't either easily be assembled or quietly abandoned.