The Looming U.S.-China Confrontation

Street scene in Shanxi. Max Pixel/Public domain

Role reversal: The United States is now the insurgent.

Trump has branded China a “currency manipulator.” Randall Forsyth of Barron’s disagrees and notes that China has been spending its “foreign-currency reserves, which have slid by roughly $1 trillion from their peak in mid-2014 to just over $3 trillion, as Beijing attempts to brake the decline in the yuan—contrary to assertions that it’s trying to drive its currency lower.” Many of Trump’s supporters view China’s sales of U.S. Treasury bonds—some $1 trillion since 2014—as part of a nefarious plot to drive up interest rates and thereby weaken the United States. But in fact, China remains the largest holder of U.S. Treasury debt, and Chinese citizens have been spending the dollars provided by the Bank of China to purchase real estate and other assets in the United States.

Uncle Xi, as he is sometimes called in China, has recently begun to limit currency outflows—a move that could cause the yuan to weaken further. “Last month, a mere quarter-point rate rise by the Federal Reserve—long-telegraphed—threw the Chinese bond market into spasms,” notes Leland Miller, chief executive officer of China Beige Book International. “While Beijing insists the system is sound and the economy is powering ahead, financial flows say otherwise: money is pouring out of the country and the yuan continues to lose steam against the dollar, despite by far the world’s largest merchandise trade surplus,” Miller said.

Trump has threatened to impose a “border adjustment tax” on goods from China and other nations. If Congress passes such a protectionist measure, then even with a phase-in period we'll see the value of the dollar jump versus the yuan, perhaps substantially, Miller said. “Hard to see how that won't cause chaos in China,” he said.

Causing chaos in China may be precisely what the Trump administration intends to achieve with its confrontational strategy. Navarro and others in the White House inner circle, particularly political counselor Stephen Bannon, are said to view China as an enemy of the United States that must be confronted after years of ineffectual foreign policy leadership under Trump’s predecessor.

Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010) and the coauthor, with Frederick Feldkamp, of Financial Stability: Fraud, Confidence, and the Wealth of Nations (Wiley, 2014). His website is

Image: Street scene in Shanxi. Max Pixel/Public domain