The Sino-U.S. summit that took place this month in Florida was somewhat overshadowed by the missile attacks on Syria that occurred during Chinese President Xi Jinping's visit with President Donald Trump.

At the very least, however, the two countries' relationship was placed on the table for future discussion and negotiation.

Our focus today is on one aspect of that relationship: Direct investment between the two countries. While we hear a lot about trade between the U.S. and China, the overall business relationship is actually much larger than just trade. And, of course, it involves a discussion about the currency question.

The claim that China engages in currency manipulation is clearly true. But beginning in 2010, China's currency structure changed.

Instead of keeping its currency pegged, the Chinese government began allowing some narrow movement in its currency. For about the next four years, as the Chinese currency traded in a tight band, the U.S. dollar was weakening.

But around 2014 we saw an increase in the value of the dollar and an even bigger increase in Foreign Direct Investment (FDI) from China into the U.S.

Yuan-exchange-rate-foreign-direct-investment-in-US-China

Once we got into 2015, however, the numbers showing FDI from China dropped dramatically. Why?

Most likely there is a combination of reasons.

  • One may be that as the price of U.S. currency needed to buy U.S. assets increased, the attractiveness of those assets decreased.
  • Another possibility is that the drop may or may not be fully authentic.
  • As we discussed last week, the numbers generated by the Chinese government are often regarded with skepticism by outside analysts.

Whatever the reason, over the past couple of years the Chinese government has seemed to be more comfortable with the renminbi weakening, at least up to a point.

My View: Regardless of why certain factors affect capital movements, I believe that the direct investment between the U.S. and China will be a flash point in forging whatever new relationship emerges from this month's summit. Trade in goods is important, but it is only one part of a much bigger picture.

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