Why the U.S. Labeled China a Currency Manipulator

It didn’t happen on day one of Donald Trump’s presidency, as he had vowed, but 2 1/2 years later he fulfilled one of his key campaign pledges: to have China officially branded a currency manipulator. The announcement by the U.S. Treasury Department, unusual in some respects, came hours after China allowed the yuan to weaken to more than 7 per dollar, a line it hadn’t crossed in over a decade. Trump tweeted that the move was “called currency manipulation” and a “major violation.” The U.S. response marks a further escalation in the trade war that Trump instigated in 2018 with claims that China has for years stolen American manufacturing jobs and intellectual property.

1. What does the manipulator label mean?

Maybe nothing tangible, at least right away. According to the U.S. law that sets out sanctions, China could be excluded from U.S. government procurement contracts, and the Treasury secretary directed to ask the International Monetary Fund for more rigorous monitoring of China’s monetary policies. But all that can only happen if the U.S. finds insufficient progress a year after the designation. One potential penalty — cutting off new assistance from the Overseas Private Investment Corp., a U.S. government agency that helps development projects — is already in effect; President George H.W. Bush enforced it in 1990 as part of a package of sanctions in response to the 1989 crackdown on protesters in Tiananmen Square.

2. Why now?

Since the U.S. first labeled China a currency manipulator, from 1992 through 1994, American politicians have repeatedly accused the Asian country of depreciating the yuan against the dollar to aid its exporters by making their products cheaper overseas. Yet successive U.S. administrations held the line against such a move, worrying about the diplomatic fallout. Today, with relations under strain after Trump imposed billions of dollars in tariffs on imports from China, labeling the country a manipulator is less of a leap.

3. What’s unusual about the move?

The Treasury Department appears to have overlooked some of its criteria (adopted under President Barack Obama and updated under Trump in May) as well as making the announcement out of sequence. China failed to meet two of the four conditions (see below) in the last semiannual currency report in May, and the Treasury took the unusual step of making the determination before the next report was due, and within hours of the yuan breaching the 7 mark.

4. So, is China a currency manipulator?

It depends who you ask. The yuan doesn’t float freely but is managed using a fairly opaque system in which the central bank, the People’s Bank of China, fixes daily reference rates. While China’s competitors, including outside the U.S., have long complained that an intentionally undervalued yuan gives Chinese exporters an unfair advantage, the past decade has seen China take steps to let the yuan’s value fluctuate against the U.S. dollar. It became one of the IMF’s five designated reserve currencies in 2016 — a reflection that China was starting to play the “economic game by the rules,” as IMF Managing Director Christine Lagarde put it. The U.S. even stopped calling the currency “significantly undervalued” in 2016. Chinese officials say they favor a stable currency, and economists say some weakness is justified as the economy slows. China’s central bank, rejecting the currency manipulator allegation, said the market had determined the yuan’s recent depreciation and the U.S. move to label it a manipulator would cause global financial turbulence.

5. What’s happened since the trade war began?

A long slide in the yuan ensued after it heated up in June 2018. Yet in August that year, the PBOC made it more expensive for local traders to bet against the yuan — a surprise move that analysts said demonstrated the depreciation had gone far enough for the central bank. The yuan strengthened after Trump called a truce on new tariffs, but began to weaken again after talks collapsed in May. Analysts cited souring market sentiment, as China forecast its slowest GDP growth in decades for 2019, and the U.S. tariffs kept coming. When on Aug. 5 the PBOC set the daily reference rate at a weaker level than analysts and traders had projected, helping send the yuan past the 7 per dollar level, it was seen as a sign that Beijing was comfortable to allow depreciation.

6. Is a weaker yuan all good news for China?

It would cushion the blow to China of U.S. tariffs by making Chinese goods more competitive relative to the dollar. But that comes at a cost. A weaker currency creates incentives for households and companies to move their money out of the country and into stronger currencies. That would force the government to draw on its reserves — the world’s biggest at more than $3 trillion — to buy yuan to prop up its value. In 2015 an abrupt devaluation spooked global markets and triggered panicky capital outflows. The country burned through about $1 trillion of reserves to stem that exodus. A weaker yuan can also stoke inflation, as imports become more expensive.

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