Republican front-runner real estate tycoon and reality TV star Donald Trump said China’s devaluation of its yuan currency would have devastating consequences for the U.S. economy. “They are just destroying us,” said Trump, referring to the effects on U.S. exports from China’s currency devaluation. Unlike the U.S., China’s central bank fixes the value of the yuan, unless it wants to devalue the currency to stimulate sluggish economic growth. China’s announcement about devaluing its currency Aug. 11 caused about a 3.5% drop in relation to the U.S. dollar, overall about 4.5% to a basket of other global currencies. Saying China was “destroying us” overstates China’s central bank’s attempt a soft landing after years of at least 7% Gross Domestic Product growth. China’s devaluation means foreign goods sold into China’s market just got more expensive, favoring China’s exports.
Dropping to the lowest exchange rate since August 2011, China’s central bank hopes to offset sluggish GDP growth. While it’s true that devaluing the yuan hurts U.S. or other foreign exports, it also helps stimulate the Chinese economy, resulting in more import and export business. “They keep devaluing their currency until they get it right. They’re doing such a big cut in the yuan, and that’s going be devastating to us,” insisted Trump, knowing that China wants to maintain enough value to maintain Special Drawing Rights in the International Monetary Funds special basket of currencies. U.S. and central bankers and presidents have tried over the years to get China to float its currency, along with other currencies like the U.S. dollar, pound sterling and euro. China resisted fearing that currency market pressures would drive the price of the Yuan to parity with the U.S. dollar and euro.
China’s People’s Bank [PBOC] rejected foreign criticism of China’s central bank decision to devalue the yuan. “Looking at the international and domestic situation, currently there is no basis for a sustained depreciation trend for the yuan,” refuting Trump’s claim that the Chinese government is out to take advantage of global currency rates. Trading at a 6.38 to the U.S. dollar, the yuan has only lost about 3% relative to the dollar. If the slight devaluation helps stimulate the overall economy, it benefits all parties, including China’s burgeoning middle class. “Apparently, the central bank does not want the yuan to run out of control,” said an unnamed traded at European bank in Shanghai. Trump believes today’s 3% could easily go to 10%, causing real havoc in U.S. and global export markets. Devaluing the currency shows China’s real concerns about the worst economic slowdown in 20 years.
Playing politics with China’s currency moves, Trump blames China for taking away American jobs. “We have so much power over China,” Trump told CNN, reversing the conventional wisdom that U.S. manufacturers have grown dependent on cheap labor. Without Chinese manufacturing, it’s doubtful the nation’s biggest retailer Wal-Mart would stay in business. Cheap Chinese labor has allowed U.S. and European manufacturers to hold down prices, especially with big ticket items, like major appliances and automobiles. “China has gotten rich off of us. China has rebuilt itself with the money sucked out the United States and the jobs that it’s sucked out of the United States,” insisted Trump, knowing the symbiotic relationship between the U.S. and China. China depends not only on the U.S. but the European Union to provide the consumer demand to buy its products.
Most Chinese manufactured goods are private label, namely, not Chinese goods per se, but U.S. or European companies maintaining their tried-and-true brands. Apple Computer does most of its iPhone manufacturing inc China because of better unit labor costs. Paying factory workers between seventy cents and one dollar an hour. Apple keeps manufacturing costs of its iPhone 6 to around $225 or a retail price of $650 for the basic model. If Apple manufactured the iPhones in the U.S., the manufacturing price would be astronomical. Trump’s charge that China exploits the U.S. relates more to manufacturers than taking advantage of China’s cheap labor markets. If anything, it’s U.S. companies exploiting cheap Chinese labor, making whopping profits and, at the same time, keeping prices competitive. Jobs flowing overseas have more to do with U.S. manufacturers looking for better profits.
Slowing to a 25-year low, China’s Ministry of Commerce had to act decisively devaluing the yuan before the GDP fell too far below the government’s 7% target growth rate. If China lapses into recession, it’s going to hurt the bottom lines of many U.S. and foreign companies. Losing about 35% of its value, the Chinese stock market shows no signs of recovering anytime soon. China’s central bank has increased fiscal spending by 24%, to offset losses from the crashing stock market.. China’s currency and stock market slide have dragged down other Asian economies, with the Indonesian rupiah and Malaysian ringgit hitting 17-year lows, with New Zealand and Australian currencies hitting six year lows. Whatever steps China takes to improve its GDP, U.S. politicians should stop pointing fingers and realize its economy is interdependent on the U.S. and EU to continue meeting its economic targets.
