The trade war with China is escalating. The most recent concern is what the Trump administration accurately calls “currency manipulation.”
Major world currencies like the US dollar, the euro, the Japanese yen, and the British pound are actively traded; the rates of exchange among these currencies are determined predominantly by market forces (traders). But the Chinese government actively manages the exchange rate between its currency (the “yuan” or RMB) and the US dollar. As of 8/8/19, the rate is 7.05 RMB per dollar, up from 6.69 earlier this year.
Some argue that weakening the RMB isn’t a problem because it helps US consumers. A stronger dollar is bad for US companies but good for US consumers, because it raises the price of American products abroad and reduces the price of Chinese products in the US.
But currency manipulation is a serious problem. Global companies must constantly forecast and prepare for changes in market-based exchange rates, but they should not have to contend with Chinese government intervention that benefits Chinese firms. Moreover, currency manipulation permits Beijing to weaken the value of its currency and counter US tariffs. For this reason, the Trump administration has no choice but to respond.
I don’t expect this issue to be resolved anytime soon, but a shift to a market-based exchange rate for the RMB is long overdue.