China would balk at a sweeping Mar-a-Lago accord

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The writer is chief economist for Asia Pacific at Natixis and senior research fellow at Bruegel

The Chinese economy has been struggling since the end of the pandemic, forced to rely on external demand as an engine of growth. It has been helped by a very weak renminbi, which has boosted the country’s competitiveness, facilitating fast growth in exports despite protectionist measures by the US and now a spread of other countries.

However, the currency shift has made imports more expensive. And the very much needed support of exports has started to wane, clouding further the economic outlook for 2025.

The Chinese currency also has dropped to a level against the dollar which is likely to bring it even closer to the attention of Donald Trump as he prepares to return to the White House, given his well-known obsession about undervalued currencies and large trade surpluses. Since the end of September, the renminbi has weakened almost 4 per cent to nearly Rmb7.3 against the dollar.

Against such a backdrop, the idea has been mooted of a grand bargain between the US and China, which would strengthen the Chinese currency and depreciate the dollar. Such a potential deal has been dubbed the Mar-a-Lago Accord, an echo of the landmark 1985 Plaza Accord in which the US persuaded Japan to accept a sharp appreciation of the yen, through concerted intervention by the five largest central banks in the world and other measures.  

Would China go for a similar deal? Well the first thing to acknowledge is how negatively the Plaza Accord has been interpreted among Chinese policymakers for decades. In particular, the impact of a very rapid appreciation of the yen from ¥237 to the dollar in August 1985 to less than ¥140 in April 1987.

The severe headwinds in exports were counterbalanced by the Bank of Japan with a rapid reduction in policy rates from 5 per cent in 1985 to 2.5 per cent in February 1987. But this only proved a trigger for the build-up of Japan’s real estate and stock market bubbles. These ended up bursting in 1990, leading to Japan’s two lost decades of meagre growth and deflationary pressures due to the collapse in corporate profitability and nominal wages.

Japan’s bitter lesson is probably enough to discourage Chinese policymakers from acceding to pressure from Trump. In the most recent trade agreement between Trump and Xi, the so-called the Phase I deal in winter 2019-20, the US did include an exchange component but the label of China as currency manipulator was finally dropped. 

Beyond China’s dislike of any agreement which resembles the Plaza Accord, there are other important reasons why a Mar-a-Lago pact of a similar scale is unlikely.

First, China’s economic situation is not that of Japan in the early 1980s but rather that of the early 1990s. China’s real estate bubble has already burst and deflationary pressures have been present for more than two years already. There is also overcapacity in a number of manufacturing sectors. In other words. China will find it very hard to cope with a strong currency, even more than Japan did in the 1980s.

Second, China’s macroeconomic imbalances are larger than those of Japan at the time, with the saving ratio being much higher and consumption much lower. In other words, China needs exports even more than Japan did then, making a potential appreciation of the renminbi much more costly. Finally, China still counts on rather draconian capital controls to isolate its exchange rate from monetary policy decisions, making it easier for China to keep a weak renminbi without paying a high price in terms of capital outflows.

Notwithstanding the above, a weak renminbi is not a free lunch for China either. One of the most negative unintended consequences comes from discouraging the international use of the renminbi, especially as an investment currency. After years of work on this, the renminbi’s international use remains underwhelming, especially when compared with the size of the Chinese economy. There have been gains made since Russia’s invasion of Ukraine as the currency has been used to bypass sanctions imposed by the West on Russia-related transactions. But even these are vanishing again due to renminbi weakness and the fear of secondary sanctions by the US.

All in all, Chinese policymakers still see the renminbi as an export tool, which is highly necessary given stubbornly stagnant domestic demand. The market should get used to a weak renminbi. For China, once again, supporting growth comes first.