US Treasury report brings a small reprieve to China in trade war

There has not been much good news lately for China on the trade war front. This week brings a small relief.

Despite repeated accusations by US President Donald Trump that the country is a currency manipulator, his own Treasury Department declined to label it as such in its latest report to the US Congress. Not all is plain sailing for the Chinese, though.

The Treasury’s conclusion was perhaps foregone. International Monetary Fund chief Christine Lagarde earlier dismissed Trump’s claim that China was manipulating its currency, called the yuan, to gain a competitive advantage in trade against the United States.

Instead, much of the yuan’s depreciation in the past year, she said, could be attributed to the US dollar’s growing strength.

Even after Trump publicly and privately pressured US Treasury Secretary Steven Mnuchin to follow his lead, Mnuchin’s own staff informed him before the report’s release that they found little evidence to support the president’s claim.

Before the new Treasury report, there was market anxiety over Trump’s allegation, as he has persisted in his single-minded trade war against China and shown willingness to undermine long-established institutional independence within the US government to get what he wants.

But unlike many of Trump’s economic advisers, the Treasury chief is not a trade hawk and is ready to stand his ground, at least this time.

But while the report provides reprieve for the Chinese in the trade war, Mnuchin did send a warning that the yuan is being monitored closely because Beijing’s monetary policy lacks transparency and that the relative weakness of the yuan poses a concern.

Treasury sends warning shot to China on currency

The yuan has fallen 10.5 per cent against the US dollar since its February high. But it remains stronger than this year’s low point of 6.9586 in mid-August.

The Treasury report finds that direct intervention by China’s central bank has been limited. But it warns more depreciation of the yuan will probably further widen the country’s trade surplus with the US, the very reason cited by Trump to launch his trade war.

But all this may be small comfort to the Chinese. Trump and his hawkish trade advisers do not need to “weaponise” the biannual report in their trade war against China.

The designation of “currency manipulator” follows stringent criteria set by two trade laws, which are difficult to bypass.

US Treasury staff finds ‘China is not manipulating yuan’

Instead, as the Trump administration renegotiates trade deals with American allies, looser “currency manipulation” guidelines have been drawn up, such as those included in the new United States-Mexico-Canada Agreement.

American officials say such guidelines will be included in future bilateral deals, which will make it difficult for allies to form separate trade pacts with “non-market” economies such as China.