Kudlow says China's currency fall is money leaving the country: 'They're going to be in a heap of trouble'

  • Chief White House economic advisor Larry Kudlow said Friday that he believes that China's economy is beginning to decline.
  • "Some of the currency fall is money leaving China," Kudlow said.
  • Currency strategists, however, say that China does not want a currency war and has not tried to drive the yuan to now 14-month lows
Larry Kudlow, Director of the National Economic Council. 
David A. Grogan | CNBC
Larry Kudlow, Director of the National Economic Council. 

President Donald Trump's chief economic advisor, Larry Kudlow, said Friday that he believes that China's economy is beginning to decline, pointing to U.S. tariffs as part of the pressure as the country's currency continues its sharp drop.

"Some of the currency fall is money leaving China," Kudlow, director of the White House's National Economic Council, said in an interview with Bloomberg TV. "If money leaves China, and the currency could be a leading indicator, they're going to be in a heap of trouble."

China on Friday released a proposal to add tariffs on $60 billion worth of U.S. goods, preparing to retaliate in the escalating trade war as the White House considers raising tariffs on $200 billion of Chinese goods. Kudlow said it looks "like the China economy is declining in growth" and, as a result, "the People's Bank of China is trying to pump it up by adding high-powered money and new credit and so forth."

Kudlow believes the fall in China's yuan is due to Beijing stopping its defense of the currency, saying he believes the Chinese "think it's going to offset the U.S. efforts to help get rid of their unfair trading." The yuan has declined steadily since the trade war began, with its price against the U.S. dollar near its lowest levels in the last 10 years.

"Some of the currency fall is money leaving China because it's a lousy investment. And, if that continues, that will really damage the Chinese economy," Kudlow said.

Currency strategists, however, say China does not want a currency war and has not tried to drive the yuan to now 14-month lows — but it is also not stepping in to prevent the decline as it normally would.

China's central bank sets a daily exchange rate for the yuan based on recent prices, and allows trading against the dollar in a band that could be as much as 2 percent above or below that level. A number of strategists say China is moving its band with the market and attempting to prevent a more rapid fall, so as to avoid capital flight. The yuan is down more 6 percent since trade tensions picked up in June.

On Thursday, Goldman Sachs economists said the currency's decline may have been behind the latest threat from the Trump administration to raise tariffs to 25 percent on another $200 billion in Chinese goods, from an earlier proposal for 10 percent. The economists said the performance of the currency may impact the U.S. decision on future tariffs.

Several U.S. administrations have threatened to call China a currency manipulator. Trump recently complained that China was keeping its currency low at the expense of the U.S., as he criticized the Federal Reserve's interest rate policies.