The U.S. Treasury Department's decision to label China a currency manipulator may satisfy a long-standing ambition of President Donald Trump, but it will have little impact on actions in Beijing as it continues to hold firm against an increasingly aggressive stance on trade and tariffs from the White House.
The Treasury Department slapped the "manipulator" label on China late Monday, declaring in a statement that Beijing "has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market." The move fulfilled an often-repeated campaign pledge from Trump to label China as a currency manipulator on "day one" of his Presidency, but contradicted the Treasury's own assessment from just three months ago.
China rejected the 'manipulator' allegations Tuesday, however, insisting in a statement from the People's Bank of China that the yuan operates under a market-based exchange rate system and that it doesn't meet the Treasury's own criteria for the "currency manipulator" label.
Under laws first established by Congress in 1998, the Treasury is obliged to "take action to initiate negotiations ... for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange" once a nation has been deemed a currency manipulator.
The Treasury has three criteria it uses to determine if a country is manipulating its currency for unfair advantage: the nation must have a trade surplus with the US of more than $20 billion, a current-account surplus of more than 3% of GDP and must buy assets worth 2% of GDP in attempting to reduce the value of its own currency on foreign exchange markets.
China was first labelled a currency manipulator from 1992 to 1994, but has remained on a so-called 'watch list' since then even as the yuan held at a peg of 8.276 versus the dollar until 2005.
The currency has since gained nearly 27% against the greenback from 2005 to 2014, when it traded at 6.06, but has weakened since then -- apart from an 18-month rally starting in 2017 -- as growth slowed and China's debt crisis took hold of the world's second-largest economy.
Given that the U.S. and China are already in negotiations over trade and commerce, the Treasury's move in deeming Beijing a currency manipulator won't compel them to fresh talks. The remaining options -- barring China from government contracts or access to Overseas Private Investment Corp funding -- are similarly ineffective in that neither would apply to the world's second-largest economy.
Treasury Secretary Steve Mnuchin said Monday that he will "engage with the International Monetary Fund" to eliminate what the department said was an "unfair advantage" created by China's decision to allow its currency, the yuan, to fall bellow the $7 mark for the first time since 2008.
That, as well, may prove fruitless, given the the IMF only last month declared the yuan to be fairly-valued on international foreign exchange markets, adding in its annual External Sector Report that China's real exchange rate was "at the same level as warranted by fundamentals and desirable policies."
"Staff estimates suggest that, after adjusting for estimated valuation changes and return on reserves, this change reflected minor net FX sales during episodes of market pressures," the IMF said. "These estimates are subject to a margin of error, which could include no intervention."
China steadied nerves Tuesday by setting the mid-point of the yuan at $6.9683, the lowest since 2008 but still inside the $7 threshold, and vowed not to use the currency as a tool in its ongoing trade dispute with the United States.
That leaves Trump with few options beyond making good on his threat to apply fresh tariffs of 10% on $300 billion worth of China-made goods on September 1, or potentially increasing that levy to 25%, if Beijing continues to resist acquiescing to U.S. demands on trade.
"We just don't know how this is going to play out," said Pantheon Macroeconomics' Ian Shepherdson. "There are too many moving parts, too many minds to read, and two unpredictable leaders to consider. We hope the tariffs on consumer goods won't happen, but we can't be confident."
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