What China’s economic resurgence means for the US treasury bonds and dollar

finance us debt

China’s economy has spent the past week posting impressive numbers in the economic data department. They posted a yearly GDP growth number of 6.9% a slight beat of the forecast of 6.8%. Then they posted an equally impressive yearly retail sales number of 10.9%.

A declining US dollar

These great numbers come out after months of seeing a slight appreciation of the yuan vs the dollar. The yuan peaked at 6.96 against the dollar in the weeks leading up to Trump’s inauguration. It has now depreciated to ranging between 6.85 and 6.91 since Trump’s inauguration.

This trend could begin to accelerate with Wall Street firms, Goldman Sachs being the latest, no longer recommending buying the dollar.

China’s bright future is due to the economy shifting from exports led by manufacturing toward offering growth in the service sector and an increase in internal consumer demand.

All of Trump’s talk may have influenced Chinese policy makers as it looks as though they are willing to allow the yuan to appreciate. In the short term this could be good for US exports, however China is focusing on fulfilling consumer demand with production within the country. They currently have a positive trade imbalance that averages around 160 billion a month. They have much less need for imports than the US economy.

Less motivation for China to finance US debt

It is widely known that China has long been the largest foreign holder of US treasury bonds. As China becomes more and more self reliant in fulfilling their domestic consumer appetite their desire to finance US debt will diminish. With inflation rising towards 2% in the US, the currently strong bond market could turn as China does not see much return on holding US debt. The motivation to hold the debt was to subsidize their export economy. A large portion of their exports have landed in the US over the last several decades.

China was subsidizing the growth of an enormously powerful manufacturing infrastructure while at the same time subsidizing a high quality of life in the US. But now that the Chinese manufacturing infrastructure is in place, along with a consumer base to purchase what the factories are producing, the average US citizens quality of life could take a hit in the coming years. Say goodbye to insanely affordable products that currently stock the shelves of Walmart and allow the lower middle class to live like kings relative to a large percentage of the world’s population.

So that is may end up being the unintended consequence of Trump begging China to strengthen their currency…a lower standard of living for the average American.

The positives that the US will see from a stronger yuan and weaker dollar

Trump ran on bringing US manufacturing jobs back to the heartland. Trump in fact was just several miles south of me yesterday at Snap On tools, continuing to promise to revive the US manufacturing sector.

The dollar index recently hit a multi-week low of 99.5. While a weaker dollar may do much to increase exports to the Chinese market, the Trump administration can focus on plenty of other markets and trade deals.