China is showing a degree of nervousness over the prospect of a Donald Trump presidency. Yesterday, they warned the US not to punish them for currency manipulation - an idea the Trump has been campaigning on.

Essentially China manipulates its currency through devaluation, making their exports cheaper. Almost all capitalist economies do not control the exchange rate for their currencies, preferring to allow the market to set rates.

But devaluing currency is almost always an emergency measure. China devalues to gain a competitive advantage - something that goes against the rules of international trade.

Washington Free Beacon:

Foreign Ministry spokeswoman Hua Chunying told reporters in Beijing that “we are following with interest the U.S. presidential election.”

Hua was asked about China’s response to a possible Trump presidency and his announced plan to punish China for currency manipulation with a tax on Chinese goods.

“Since it belongs to the domestic affair of the U.S., I am not going to make comments on specific remarks by the relevant candidate,” she said.

“But I want to stress that China and the U.S., as world’s largest developing and developed countries, shoulder major responsibilities in safeguarding world peace, stability and security and driving world development,” the spokeswoman added.

“The sustained, sound and steady growth of China-U.S. relations serves the fundamental and long-term interests of the two countries and benefits the world. We hope and believe that the U.S. government will pursue a positive policy toward China in a responsible manner.”

The comments came as Wang Yi, the Chinese foreign minister, is holding talks in Washington that include U.S. concerns about a Chinese military buildup on disputed islands in the South China Sea, and cooperation on dealing with North Korea’s nuclear and missile provocations.

Hua said Wang and Secretary of State John Kerry agreed the two sides will enhance cooperation and increase talks and exchanges.

“We stand ready to preserve and advance China-U.S. relations together with the U.S. side,” she said.

Trump's proposal - taxing Chinese imports - might lead to a tit for tat trade war between the world's largest economies. Hundreds of billions of dollars in trade would be disrupted. Frankly, I don't think Trump is serious. But in case he is, it's good to remember the Smoot-Hawley tariff bill of 1930 that eventually cut US trade in half, worsening an already terrible depression. 

Smoot-Hawley was a far broader tariff, but there's a possibility that the trade war would spead to other economies where Chinese imports are costing a lot of jobs. It's the uncertainty that China is concerned about and is warning Washington about the consequences.