Across The Border

Why the US won’t label China a ‘currency manipulator’

Analysts say there’s a growing likelihood the two countries will coordinate on exchange rate policy, which will support the yuan

PUBLISHED : Tuesday, 28 February, 2017, 5:02pm
UPDATED : Tuesday, 28 February, 2017, 10:50pm

With the US Treasury promising it will not rush to label China a currency manipulator, analysts say there is a stronger chance the two largest economies in the world will cooperate on exchange rate policy, which may halt the yuan’s depreciation.

Although just last week US President Donald Trump called China the “grand champions” of currency manipulation, some analysts believe the comment was nothing more than his typical “bluster”.

Trump said in an interview with Reuters on Thursday that he had not “held back” in his assessment that China manipulated its currency.

“Well they, I think they’re grand champions at manipulation of currency. So I haven’t held back,” Trump said. “We’ll see what happens.”

The remarks came on the same day the new Treasury Secretary Steven Mnuchin said in two separate media interviews that no judgement on currency manipulation will be made until the April review, as part of the Treasury’s Congressional mandated report on the international economy and the foreign exchange market.

Mnuchin said he had had “very good conversations” with his Chinese counterparts and pledged a methodical approach to analysing the country’s currency practices, along with those of other major US trade partners.

It seems more likely that this April the US Treasury will retain China in the monitoring list instead of declaring it as a currency manipulator
Larry Hu and Jerry Peng, Macquarie Research

His remarks were widely seen as a step back from Trump’s fiery rhetoric on the campaign trail in which he frequently accused China of suppressing the yuan in order to make its exports cheaper. He even vowed to officially label China a “currency manipulator” on his first day in office.

“The threat to cite China as a currency manipulator on day one proved to be bluster,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman, in a recent research report.

“Both [President] Bush and Obama had indicated when they were on the campaign trail, that they would cite China too. However, as they became aware of the facts and the framework, they too refrained from citing China.”

It would also be difficult for the Trump administration to claim the Chinese currency is being pushed artificially low, as many models suggest it is “near fair value”, he added.

According to the US Treasury’s last review in October 2016, it uses three criteria to determine if an economy is a manipulator: that country’s trade surplus must be above US$20 billion with the US; its current account surplus must be above 3 per cent of gross domestic product; and its net purchase of the US dollar must be above 2 per cent of GDP over a 12-month period.

“Currently China only meets the first one, while countries like Germany, Japan and Korea meet two of them,” said Larry Hu and Jerry Peng, analysts for Macquarie Research, in a recent note.

In particular, China is net selling the US dollar “to make the yuan stronger, not weaker”.

“It seems more likely that this April the US Treasury will retain China in the monitoring list instead of declaring it as a currency manipulator,” they said.

The fact that Trump did not officially label China a ‘manipulator’ after taking office seemed to show a gesture of dialogue with China
Xiangrong Yu and Hong Liang, CICC analysts

Analysts from Beijing-based investment bank CICC (China International Capital Corporation) believed the probability has become higher that the US and China might be willing to enhance their coordination on the exchange rate policy.

“The fact that Trump did not officially label China a ‘manipulator’ after taking office seemed to show a gesture of dialogue with China,” said CICC analysts Xiangrong Yu and Hong Liang.

“Mnuchin’s emphasis on technical assessment indicates that the risk of China being labelled a ‘manipulator’ has dropped.

“After all, singling out China as a ‘manipulator’ would overthrow the established assessment framework and the long tradition of solving currency disputes through bilateral engagement, and it might lead to trade retaliation from China.”

In a response to Trump’s assertion that the Chinese are the “grand champions” of currency manipulation, Beijing struck back on Friday, saying it has no intention of gaining trade advantages by devaluing its currency. It also expressed its willingness to coordinate with the US on the matter.

“He (Mnuchin) said he is interested in an early meeting with his Chinese counterpart. We also want to establish working relationships at various levels with the US to have effective communication and coordination,” Geng Shuang, a spokesman for China’s Foreign Ministry, said at a press conference on Friday.

Closer cooperation on currency policy between the two countries would provide the yuan with some support and change market expectations, according to the CICC analysts.

“As the US-China trade imbalances are an important source of concerns for the US government, exchange rate coordination between the two countries is much needed and there is not much room for RMB depreciation,” they said in their note.

“The Chinese government is also willing to see a relatively stable RMB. All these factors will help ease the downward pressure on the RMB.”