China-US currency deal would not be a new Plaza Accord of one-sided exchange rate movement, analysts say

Currency provisions are expected to be included in any interim deal between China and America following progress made during talks last week in Washington
The 1985 Plaza Accord saw Japan, France, Germany, Britain and the US push down the value of the US dollar, resulting in the Japanese yen doubling in value

US-China trade war

Karen Yeung

Published: 6:45am, 19 Oct, 2019

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An exchange rate pact between China and the United States that is set to form part of an interim trade deal between the world’s two biggest economies is expected to reduce risks of exchange rate turbulence and is unlikely to engineer a one-sided currency movement as the Plaza Accord did in 1985, according to analysts.

For the US, and particularly President Donald Trump, a large depreciation of the yuan must be avoided, since it could offset the effectiveness of the tariffs on Chinese goods imported into the United States that have formed a major part of the ongoing trade war with China.

When the value of the Chinese currency weakened beyond the psychological level of seven yuan to the US dollar in August for the first time since the global financial crisis a decade earlier, Trump sharply criticised the move, prompting the US Treasury to label China as a “currency manipulator” despite strong opposition from Beijing.

This week, the US Treasury postponed the release of its foreign exchange rate report amid speculation that it will wait until a trade deal, including provisions on currency, is complete so that it can remove the currency manipulator designation from China.

The 1985 Plaza Accord saw Japan, France, Germany, Britain and the US agreed to push the value of the US dollar down against the Japanese yen and German Deutsche mark. Photo: AP

Last week in Washington, China and the US appeared to have agreed a “phase one” trade deal, with China’s Ministry of Commerce confirming on Thursday that negotiating teams from both sides have maintained “close communications” as they work towards finalising the partial deal.

Analysts said the mutual objective of preventing a sharp yuan drop gives Beijing and Washington common ground to agree on “avoiding competitive devaluation”, especially in light of the track record of G20 agreements over exchange rates and the existing currency provisions in recent bilateral trade texts such as the US-Mexico-Canada Agreement.

China is trying to maintain a delicate balance between preventing a large devaluation of its currency – which could trigger investor panic and capital outflows – and engineering a mild depreciation to help exports and economic growth amid the trade war.

China won’t be willing to accept an appreciation in its currency under the current environment … unless [the US] rolls back tariff increases

Nathan Chow

Shaun Roache, Asia-Pacific chief economist at S&P Global, argued that the US has “become fond of including currency provisions in its trade agreements” and that there is “well-trodden path” in G20 statements as well as the US-Mexico-Canada Agreement on avoiding competitive devaluation.

But while a sharp yuan devaluation is unlikely, China is also unlikely to accept a Plaza Accord style exchange rate appreciation. A key reason for China’s opposition to a Plaza Accord-like agreement is the widespread belief in Beijing that it was a major cause of Japan’s asset bubble in the late 1980s and the following lost decades of economic stagnation.

“China won’t be willing to accept an appreciation in its currency under the current environment … unless [the US] rolls back tariff increases,” said Nathan Chow, an economist at DBS Bank.

The 1985 Plaza Accord saw Japan, France, Germany, Britain and the US agree to push the value of the US dollar down against the Japanese yen and German Deutsche mark.

The five countries began selling large amounts of US dollars, leading to a significant loss in its value, while the intervention resulted in the Japanese yen doubling in value against the US dollar in under two and a half years.

China has been describing its exchange rate policy as a market-based “managed floating exchange rate system”, or a soft peg to the US dollar. As part of this regime, the People’s Bank of China publishes a central rate for the onshore currency market every trading day, with the exchange rate between the US dollar and the yuan allowed to move within a limit of 2 per cent either side.

The central bank also wields huge influence in the yuan exchange rate through intervention as well as “window guidance” to state-owned banks, which are the major players in the onshore market.

An editorial published last week in the China Times, a Chinese financial newspaper, stated flatly that a currency deal between China and the US could be anything but a new Plaza Accord.

“Japan offers a good lesson [for China] to learn from,” the editorial argued. “But there’s nothing to fear about a currency deal – stabilisation [of the yuan exchange rate] does not mean appreciation, let alone one-way appreciation or being forced to appreciate.”

Steen Jakobsen, chief economist and chief investment officer at Saxo Bank agreed that a currency pact included in the US-China interim deal would be far away from the Plaza Accord, and if agreed upon, would likely be a bilateral deal between the two superpowers, without involving intervention from other countries.

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