President Trump on Friday announced the first concrete deal with China to come out of nearly three months of trade talks – a deal to prevent currency manipulation.
Speaking at the White House during a meeting with Chinese Vice Premier Liu He, Trump also disclosed that the Chinese will be buy 5 million tonnes of U.S. soybeans is an arrangement that is not part of any forthcoming trade agreement.
Trump still hedged his bets about whether an overall deal will be agreed, saying he believed that it was “probably more likely a deal does happen, but that doesn’t mean it is going to happen.”
After two days of talks, the fourth round of negotiations since January, the Chinese delegation decided to stay in Washington for two extra days of negotiations before returning home, which Trump said “that means something.”
The biggest unresolved sticking point is the US demand that China stop forcing US companies to form joint ventures with Chinese firms when they do business in China. The arrangement often results in the Chinese partner getting hold of US trade secrets and then ending the partnership.
Trump gave no details about the agreement on currency manipulation, which has been a bone of contention between Washington and Beijing for two decades. China’s central bank sets a narrow range for the Chinese currency, the renminbi, at which it can trade against other currencies.
In the past, the Chinese have used the renminbi as a trade tool, decreasing its value when there was a policy decision to boost exports. The Chinese also reduced the value of their currency when Trump first imposed tariffs on Chinese goods in an apparent effort to blunt the effect of the taxes. A lower renminbi would reduce the dollar price of a good for tariff purposes.
One reason that it is likely that currency was the first agreement was that the Chinese now no longer need to manipulate their money’s value. They depend less on supporting export industries with investments and want to stabilize their currency.
Hans Redeker, a foreign currency analyst for Morgan Stanley, said in a note to clients that domestic funding sources are increasingly stretched in China, limiting the government’s ability to use credit to drive investment in export industries.
“China has multiple options for investment promotion,” Redeker said. “It can open financial markets to foreign funding or switch its growth model by de-emphasizing investment and promoting consumption. Both outcomes lead to renminbi strength.”
If, for example, China allowed more foreign capital in China, that would cause investors to buy renminbi with dollars, causing the Chinese currency to rise. If China decides to switch to a more consumer economy, that would transfer wealth to Chinese households, also increasing demand for Chinese currency.
The upshot is that China was willing to do this deal without the threat of higher tariffs because it views a stable renminbi – trading at around 7 to the US dollar – as being in its own long-term interests.
Trump said he still hoped to meet Chinese President Xi Jinping in March, possibly at the Mar-a-Lago resort in Florida, when most major issues have been agreed and just a few points need to be resolved.
He talked about being flexible on his deadline for higher tariffs, now set to rise from 10% to 25% on March 2. He said the date was not “magical” but did not confirm that he would extend the deadline. In addition to currency, there are five other areas that need to be agreed.