Not So Fast: China Will Not Allow Use Of Yuan As Bargaining Chip To Resolve Trade War

With market optimism brimming that it's just a matter of days, if not hours, before the US and China reach a truce in the ongoing trade war - even though there have been countless accurate analyses in recent weeks explaining why an actual trade deal is impossible since the object of contention is not trade at all but China's creeping technological dominance, something which Beijing will never voluntarily concede - Beijing has poured cold water over expectations of an imminent deal when China's Ministry of Foreign Affairs said on Wednesday that China will not use the yuan’s exchange rate as a bargaining chip to resolve the trade war with the United States, Caixin reported

Speaking at a press briefing, foreign ministry spokesman Geng Shuang, said that China won’t resort to currency depreciation for competitive purposes in trade and hopes the U.S. can respect market rules and not politicize currency issues.

Geng’s comments followed a Tuesday report from Bloomberg that the U.S. is pressing China to keep the yuan stable and not devalue the currency as part of an agreement intended to end the countries’ trade war (a paradoxical position as it presupposes China would manipulate to keep its currency strong, while at the same time the US is pushing Beijing to liberalize its currency, even if it means market forces set the yuan weaker).

Bloomberg also reported that officials from the two countries have been discussing how to address currency policy in a memorandum of understanding that would form the basis of a U.S.-China trade deal. However, it now appears that any concessions by China over its currency are a non-starter, meaning the two negotiating positions will be even further alienated following Beijing's denial to comply.

The Ministry's terse response also follows an earlier report from SCMP, according to which Beijing would likely accept conditions requiring a "stable" yuan to be included in the memorandum of understanding. "Analysts" quoted by the SCMP pointed out that by insisting that China change its currency-management strategy to prevent the yuan from depreciating past a certain level, Washington would be playing into Beijing's hands. Because the PBOC has already been trying to accomplish with its strict rules on capital outflows since at least the summer of 2015.

A deal between China and US that requires Beijing to keep the yuan exchange rate above a certain level would be a recognition of Beijing’s long-held guiding principle of “keeping the yuan stable at a reasonable equilibrium”, said Ken Cheung Kin-tai, senior Asian currency strategist at Mizuho Bank. "From China’s perspective, this would also be acceptable," he added.

Cheung said that China has already been making efforts to stabilise its currency to alleviate fears of yuan depreciation and to boost the currency’s international appeal.

"Yuan stabilisation will be the optimal solution to balance out risks of capital outflow, trade negotiations and China growth slowdown," he added.

In retrospect, the analyst was wrong.

As a reminder, Chinese Vice Premier Liu He will visit Washington this week for another round of trade negotiations, his second trip in three weeks, as the two countries race the clock to strike a deal to avert an escalation in the trade war before a March 1 deadline; The talks follow a round of negotiations that ended in Beijing last week without a deal but with signs of progress, and curiously take place even as the market has effectively priced in a favorable outcome.