Throughout his campaign, US President-elect Donald Trump accused China of actively keeping its currency artificially low.
He promised he would label China a currency manipulator on his first day in office, and in an early-December tweet he repeated that criticism along with attacks over Chinese trade policy and activity in the South China Sea.
While Trump has not yet taken office, his economic team has started to take shape. Back on December 12, Trump named Gary Cohn, the president and COO of Goldman Sachs, as the next director of the National Economic Council. At the time, Trump said of Cohn:
“He will help craft economic policies that will grow wages for our workers, stop the exodus of jobs overseas and create many great new opportunities for Americans who have been struggling. He fully understands the economy and will use all of his vast knowledge and experience to make sure the American people start winning again.”
Interestingly, Cohn seems to have a differing opinion on China and, more specifically, its currency. While Trump thinks the yuan is too weak, Cohn believes the currency is just the opposite, too strong. In an interview with Bloomberg back in January 2016 that was highlighted by the Library of Economics and Liberty, Cohn said (emphasis ours):
“The Chinese have taken multidecade views on what they’re doing. They built up their surplus capital account over many, many years. It is going down. It is undeniably going down, and you can see it in the numbers. They may take some actions in the next few months to deal with that. You know, look, so I believe that they’re going to end up devaluing the currency? I do believe they will end up devaluing the currency.”
“At the start of 2015 there were three countries in the world that were willing to have a strong currency. The Swiss, the Chinese, and the U.S. The Swiss pulled the rip cord overnight. They just ripped it off and said, ‘We are done. We are done having a strong currency. It is too expensive to defend this.’
“And now you have two countries, two countries in the world that are willing to have a relatively strong currency, and it is unsustainable that the rest of the world try and devalue against these two currencies. It is not fair to those two countries. And I think we have got to do something with this. We will never have those real conversations, but if we woke up tomorrow and every central bank in the world raised their interest rates by 300 basis points, the world would be a better place. No currency should move because all the relationships would be the same, but insurance companies would work, pensions would work, savers would work, we would get people out of bank-loan funds, we would get people out of bond funds and they could put their money back in banks and back in government bonds where it belongs.”
China weakened the yuan by more than 7% in 2016 in an attempt to navigate its economy through a rough patch.
While Cohn's views on the Chinese currency could very well have changed over the course of the past year as it weakened, he at least seems to understand the reasons as to why Beijing is making the yuan weaker, and that there still could be further weakness ahead.
In fact, Deutsche Bank strategist Gautam Kalani says the yuan is "the most expensive" currency in the world on a trade-weighted basis, and that its the most attractive currency to short.
While Kalani didn't go into specifics, that's likely because as the dollar strengthens on expectations for Federal Reserve interest-rate hikes, the yuan gets weaker and money pours out of China
"Beyond the headline data, other indicators point to increasing capital outflows and bearish sentiment on the yuan," Bloomberg economist Tom Orlik wrote in a note following the latest release of China's foreign-exchange reserves, which showed gross reserves decreased by $69.1 billion, the largest drop in 10 months, to $3.05 trillion in November.