The U.S.-China trade war is turning into a currency war. Former Trump campaign Economic Advisor Stephen Moore says the Chinese economy is facing a huge downside risks. He thinks the Fed should cut interest rates as soon as possible to deal with deflation.
Last week, the RMB exchange rate against the U.S. dollar fell below the 7-Yuan mark, shaking global markets. Moore sees it as a short-term fix to deal with increased U.S. tariffs, but said it doesn’t fix any long term problems. “Essentially what you’re doing when you’re manipulating your currency as you should be driving down the value of the Yuan, and that makes the Chinese people poorer, because it means that the Yuan that they hold buys less than it would,” he said.
Moore pointed out that the fall of the RMB exchange rate is a further blow to the fragile Chinese economy since so much of China’s assets are dollar-denominated. He thinks China is in for an economic free-fall.
“I don’t think that Beijing leaders really understand how vulnerable China has been. If we can’t trade with China, we sneeze; if China can trade with the United States, they catch pneumonia.”
President Trump said on August 9 he is not ready to reach a trade deal with China.
Beijng refused to make concessions in the last round of trade talks, which disappointed Washington. Moore says it’s a critical moment now, and Trump cannot make any concessions to China. “This is an important moment in world history,” he said. “The United States cannot capitulate and cave in to China, cannot! That would be the worst possible outcome. I would rather have the trade war go on than see Trump retreat in anyway.”
Moore says China has to make the next move, which needs to include some concessions. “If they do, the United States will make concessions too, but it’s a it’s a precarious moment for the United States, China and the whole world economy.”
Last week, several countries’ central banks cut their interest rates, and global market demand for U.S. dollars quickly rose. Moore said the Fed should immediately slash interest rates another 50 basis points. He said they made a mistake in not doing that at their last meeting. “You know global markets are in turmoil right now. Commodity prices are falling. We’re in a deflationary, and the fed has to cut that off immediately by having an emergency meeting and correct it.”