US Treasury says China is not manipulating the yuan. Trump says it is, and he may win

Neal Kimberley says China is not a currency manipulator by the US Treasury’s own criteria, but politics may dictate that the US formally classifies Beijing as one. Such a move would exacerbate the already tense China-US relationship

PUBLISHED : Tuesday, 04 September, 2018, 2:01pm
UPDATED : Tuesday, 04 September, 2018, 10:46pm

US President Donald Trump might regularly assert that China is a currency manipulator but the US Treasury has yet to make that categorisation in its key semi-annual report to Congress, on the “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States”. But with the next report due next month, there’s a material risk that the US Treasury will now take that step. 

Such a categorisation would only add to the tension in an already strained China-US economic relationship, as Washington would then be obliged to seek bilateral negotiations with Beijing over the issue, and although Trump could ultimately deploy a waiver, if no solution was agreed within one year, the US administration would be required to adopt measures that would result in “remedial action”.

It’s definitely not a step Washington should take lightly but if the Trump administration does want to categorise China as a currency manipulator, then the occasion of the report’s publication, due at the earliest on October 15, would be the opportune moment to do so, just ahead of critical US congressional midterm elections in November.

“I think China’s manipulating its currency, absolutely,” Trump said on August 20.

Trump’s view is unchanged even though, on August 24, the People’s Bank of China reintroduced the counter-cyclical factor, which in current circumstances lends itself to the calculation of a slightly stronger daily value for the renminbi.

China’s steady hand on falling yuan bolsters confidence

“They’’e trying to make up for lack of business by cutting their currency,” Trump told Bloomberg News last Thursday. “It’s no good. They can’t do that.”

But, revealingly, Trump also showed that he was aware that the most recent semi-annual report, published in April, hadn’t cited China, or indeed anyone else, as a currency manipulator, as no countries had met all the established criteria for such a designation.

“It is a formula. And we are looking very strongly at the formula,” Trump said last week.

Allowing the yuan to weaken is not the same as acting in the market to engineer weakness

It would therefore seem that, under the current formula, the US Treasury cannot categorise China as a currency manipulator, and Washington is looking to move the goalposts, presumably to make it easier to designate China as such.

Of course, Trump might also be concerned about losing face if it transpires that, despite his repeated insistence, his own US Treasury, headed by Steven Mnuchin, won’t categorise China as a currency manipulator. Admittedly, back in July, Mnuchin said that yuan weakness would come under scrutiny as part of the US Treasury’s wider deliberations as it prepared the next semi-annual report. “I’m not saying whether it’s a weapon or not a weapon [but] there’s no question that the weakening of the currency creates an unfair advantage for them,” the US Treasury secretary said.

Yet Mnuchin, speaking to CNBC on August 28, said that China’s currency “is more of a controlled currency than other markets that are free access. But if they go in and support their currency, that is not currency manipulation.” He added that if China lets its currency weakens, “either for structural reasons or for actual manipulation, that is something that is manipulation”.

Why investors aren’t panicking as the yuan’s value plummets

While Mnuchin’s comments illustrate the double standard Washington adopts when defining currency manipulation, as it stands, the US Treasury cannot currently classify China as a currency manipulator because China doesn’t meet all three of the criteria that the US Treasury monitors.

In fact, it meets only one, namely that a country runs a significant bilateral trade surplus with the United States that is at least US$20 billion.

China does not meet the second condition that a country must run a current account surplus that is at least 3 per cent of its gross domestic product.

Beijing to Trump: we won’t use yuan as a trade-war weapon

Nor does China meet the US Treasury’s third criterion that the country in question must have engaged in persistent, one-sided intervention in the foreign exchange market, which the US Treasury defines as being 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”.

Allowing the yuan to weaken is not the same as acting in the market to engineer weakness.

Of course, whether the US Treasury classifies China as a currency manipulator is ultimately a political decision for the Trump administration, although it might be hard for Washington to do so without embroiling the other five nations currently on the US Treasury’s monitoring list: Germany, India, Japan, South Korea and Switzerland.

But it could happen. And in light of Trump’s recent comments, there is now a material risk that, next month, the US Treasury will categorise China as a currency manipulator.

Neal Kimberley is a commentator on macroeconomics and financial markets