Is China a currency manipulator or is Donald Trump to blame for the yuan’s weakness?
Neal Kimberley says the drop in the yuan is more likely to be a market response to the US-China trade war than the result of active management by the Chinese authorities
The Chinese renminbi “has been dropping like a rock”, said US President Donald Trump in a CNBC interview on Friday, also tweeting that China and others “have been manipulating their currencies and interest rates lower”. Both assertions are debatable. Nor is there any acknowledgement that Washington’s resort to trade tariffs on China has contributed to recent yuan weakness.
For example, measuring a move in foreign exchange, as in all markets, depends as much on the start point as on the end date. Certainly, as Douglas Porter, chief economist at Canada’s BMO Capital Markets wrote on Friday, the yuan “is down 7 per cent in three months, a very big move”.
Yet, as another Canadian firm, TD Securities, noted last Thursday, the yuan’s real effective exchange rate “had diverged significantly over the past year from the rest of Asia, and particularly north Asia, by appreciating by 7.3 per cent into the end of May”.
Consequently when yuan weakness became more pronounced in June, the subsequent fall in the China Foreign Exchange Trade System official index, which measures the yuan’s value against a basket of currencies, led TD Securities to write of the unwinding of “over two-thirds of the [yuan’s] appreciation over the course of the past year”.
Clearly that unwinding has occurred quickly, but if the yuan was overvalued, the process might have occurred anyway, albeit at a slower pace.
Watch: CNBC’s interview with Donald Trump
Perhaps the real question should be what was the catalyst for the recent fall in the value of the yuan?
It might be politically convenient for the US administration to attribute recent yuan depreciation to manipulation by China but the timeline of Chinese currency weakness parallels the sequence of the ratcheting up of trade tensions between China and the United States as Washington has moved to announce trade tariffs.
The yuan “weakened sharply in the second half of June, when the trade spat with the US flared up”, wrote Stephen Li Jen of London-based Eurizon SLJ Capital last week, noting also that the year-to-date “performance gap between US equities and Chinese equities is now in excess of 20 per cent”, which is “consistent with the view that the equity markets think China has more to lose from an outright trade war with the US”.
Extrapolating that view on equities to currencies, the very yuan weakness which is so vexing President Trump is arguably a rational market response to the US’ own resort to trade tariffs in Washington’s attempts to reset China-US trade relations. In that light, President Trump’s voiced concern about the yuan’s fall rings a little hollow.
But if the issue of yuan weakness is somewhat more complicated than merely characterising it as “dropping like a rock”, what of President Trump’s tweeted accusation that China, among others, is manipulating its currency lower?
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...
— Donald J. Trump (@realDonaldTrump) July 20, 2018
A good starting point in this regard might be the most recent edition of the US Treasury’s own semi-annual report to Congress on “The Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” that was published in April.
The report shows China did not meet the US Treasury’s criteria of currency manipulation, which states that “persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2 per cent of an economy’s GDP over a 12-month period”.
More recently, while recent yuan weakness is undeniable, US bank Wells Fargo Securities, writing on July 16, argued that the “Chinese authorities do not want to see a sharp depreciation of the [yuan] because it could lead to volatility in other financial markets, which could have a negative effect on economic growth”.
“For China, the same officials who were in charge during the [yuan] tantrums of August 2015 and January 2016 are still in power,” Eurizon SLJ Capital’s Jen wrote, and “vividly remember how currency movements in China could so easily trigger an avalanche of very large-sized flows”. China would likely wish to avoid such a possibility.
At any rate, there’s a world of difference between recognising and not impeding market forces that are inclined to push the yuan lower, and being complicit in a process of manipulating the currency weaker.
President Trump would surely be unpersuaded, but his argument that the yuan is “dropping like a stone” is contestable and his tweet that China is manipulating its currency lower doesn’t really stand up.
The United States has upped the ante with China on trade and the market has decided that lends itself to a weaker yuan. That’s just how it is even if it doesn’t suit Washington.
Neal Kimberley is a commentator on macroeconomics and financial markets