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China’s Currency Conundrum

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If China let the market set the yuan's value, it would be a lot lower right now.Photograph by Karl Johaentges — Getty Images/LOOK

Good morning.

News out this morning that China’s foreign exchange reserves fell below $3 trillion for the first time in six years. Nothing magic about that number, except as a sign of another source of potential instability for the global economy. China has bled more than a trillion dollars in reserves in the last year and a half, as its investors rushed to move money offshore and its corporates repaid some of the dollar debt they had gorged on as they exploited the Federal Reserve’s zero interest-rate policy post-2008.

Rising U.S. interest rates plus threats of U.S. trade action against China mean that pressure will only increase. As a result, the Chinese government will face a tough set of choices: either allow the yuan to fall, which reduces Chinese purchasing power; impose stricter capital controls, which moves China away from financial integration with the global economy; or see its mountain of foreign currency continue to crumble.

It’s probably worth pointing out again that what’s happening in China is precisely the opposite of what President Trump accused it of repeatedly during his campaign: manipulating the yuan down to encourage exports. Let’s hope Gary Cohn has scheduled a briefing on this topic.

Meanwhile, the rollback of Dodd-Frank financial rules continues. The head of the U.S. Securities and Exchange Commission took steps Monday to delay the controversial rule that requires companies to disclose a ratio that compares a chief executive’s pay to that of the median pay of his or her workforce. Acting SEC Chairman Michael Piwowar invited companies to submit comments on “any unexpected challenges” they are facing in complying with the rule, which is scheduled to take effect later this year.