Thursday, August 27, 2015

Trump is Clueless When It Comes to China...I Mean Really Clueless

By Charles W. Calomiris

My jaw dropped last night watching Bill O’Reilly nod in response to Donald Trump’s claims about Chinese currency depreciation. Mr. Trump explained to Mr. O’Reilly that China has been depreciating its currency for some time, and that the recent devaluation was just the last in a long series of its manipulations. And, of course, he explained, the depreciation of the yuan is causing havoc in U.S. stock markets because the cheapening of Chinese goods will further rob American companies and workers of the potential to make and sell products at a fair price. Trump called for the U.S. to respond to yuan under-valuation with a tariff on Chinese goods
In economics, there is lots of room for difference of opinion, and although Mr. Trump is entitled to his own opinion, he is not entitled to his own facts.

Real fact #1: Until very recently, China’s currency, the yuan, has been appreciating, not depreciating. From 1995 through 2014, China’s exchange rate appreciated by 26%. From 2007 to 2014 alone it appreciated by 19% (see my May 19, 2015 column, “Nonsensical Accusations of Protectionism Through Currency Manipulation”).

Real fact #2: The real exchange rate between China and the U.S. – which measures the relative purchasing costs of goods and services in the two countries – has appreciated even more – 53% since 1995, and 34% since 2007. In other words, China’s goods and services have been getting much more expensive relative to U.S. goods and services over the past two decades, especially so in recent years. Last month the IMF recognized that dramatic trend of appreciation in the real exchange rate publicly and declared that, according to its calculations, the yuan was now fairly valued (neither over-valued nor under-valued).

Real fact #3:  This month’s yuan “devaluation” saw a reduction in the value of the Chinese currency of only 3%. 


  1. I still don't understand how that kicked off a 900 point stock sell off. At least that is what is being claimed by some. Can anyone 'splain?

  2. The formal Keynesian explanation is, I believe, "Animal Spirits".