China's Record US Surplus Threatens Trade Tensions, May Trigger Manipulator Tag

China's record trade surplus with the United States threatens to inflame tensions between the world's two biggest economies as officials prepare a report for Congressional lawmakers that could end up accusing China of manipulating its currency in order to boost exports and undercut American rivals.

Official customs data published Friday showed that China's September U.S. trade surplus rose 22% from last year to a record $34.13 billion, taking the year-to-date total past $225 billion despite raft of tariffs on goods from the world's second largest economy and months of 'America first' rhetoric from the White House. The figures are likely to not only escalate tensions between Washington and Beijing, as officials exchange barbs over tariffs and security, but may also potentially influence the Treasury Department's twice-yearly assessment of the currency policies of America's trading partners.

"For all the talk of trade wars being easy to win, the trade data we've seen this morning suggests it may not be quite so straightforward," said Oanda's senior market analysts Craig Erlam. "This would appear to be particularly true when the deficit country's economy is boiling hot and tax reforms mean the consumer has a few extra dollars in their pocket to throw around. While this trend isn't expected to continue as the tariffs become increasingly harsh, more consumer goods are thrown into the mix and pre-emptive order flow passes, it will no doubt be infuriating Trump and pleasing those that oppose such measures."

China's yuan has fallen around 9% against the dollar over the past six months, partly as a result of the concurrent rise in the U.S. dollar index of 6.2%, which benchmarks the greenback against a basket of six global currencies, as the Federal Reserve has both raised interest rates and signaled tightening ahead for the booming U.S. economy.

In fact, Chinese officials fixed the yuan at 6.912 earlier today, just a few ticks from the decade low of 6.93 the currency traded at in mid-August as the pairing creeps towards Beijing's unofficial 'red line' of 7.0 against the dollar.

Treasury Secretary Steven Mnuchin, who is expected to communicate his department's findings as part of the The Omnibus Trade and Competitiveness Act of 1988 next week, has so far refused to be draw into commenting on reports that he will fall short of recommending that Congress label China a currency manipulator, something that hasn't been done since 1994 but has been consistently suggested by the President himself.

"What we go through on the report is a technical analysis," Mnuchin told CNBC Friday in Bali "I'm not going to say what the result is but it is very thorough analytics."

Trump told Reuters in an interview in August that "I think China's manipulating their currency, absolutely", and insisted in a sit-down with Bloomberg that his administration is "looking very strongly at the formula" that would apply the label on Chinese officials.

Labeling China as a currency manipulator would require the U.S. government to either start formal talks with Beijing on how to address the allegation or seek redress from the International Monetary Fund.

IMF Managing Director Christine Lagarde told the Fund's annual meeting in Bali that the yuan weakness "has a lot to do with the strength of the dollar", noting that if you compare other currencies to it, the renminbi, there is a bit of depreciation, but certainly not that much."

"We are seeing more and more countries, including China, let their currencies fluctuate," Lagarde noted. "And that certainly has been the case for the last three years for China.

That may not sit well in Washington, however, as the President attempts to increase pressure on Beijing over what he sees as unfair trade practices while simultaneously attempting to validate his tariff policies, which have added levies on $200 billion worth of China-made goods and threatened similar additions on $267 billion more, ahead of this year's mid-term elections.

"We are going to make sure that currency is definitely part of these (trade) discussions," Mnuchin said Friday. "We are going to make sure that whatever we make up on trade we don't lose on currencies."

Mnuchin told CNBC earlier 

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