China economy

How the US stopped complaining about China’s exchange rate policy

PUBLISHED : Monday, 20 November, 2017, 2:02pm
UPDATED : Monday, 20 November, 2017, 11:07pm

The United States’ loud complaints about the Chinese currency’s exchange rate, a thorny issue in the two nations ties over the past decade, have quietly faded away since Donald Trump became US president.

Washington has regularly complained over the years that China’s government has manipulated its currency’s value to give it an unfair advantage against other trading nations, with Trump frequently repeating the allegations during his election campaign.

The issue, however, barely surfaced during Trump’ trip to China earlier this month.

A less bellicose stance from the US over the yuan also received fresh impetus this month with the publication of two Federal Reserve research papers.

John Clark, an official at the Federal Reserve Bank of New York, wrote in a paper on the bank’s website last week that the yuan exchange rate has “evolved to more closely resemble behaviour generally observed in freely floating currencies”.

Meanwhile, J. Scott Davis, an economist at the Federal Reserve Bank of Dallas, wrote in a separate research note that China’s capital account controls to shore up the value of the yuan “may have been a key factor that averted a full-blown financial crisis in the country”.

Time right to loosen controls on yuan-dollar exchange rate, says China state-run paper

The reports do not represent the official stance of the US central bank, or the US Treasury department, but they suggest that the US authorities are increasingly unwilling to label China a currency manipulator or press it to free up its yuan exchange rate regime.

The findings in the Federal Reserve papers are fairly close to the Chinese central bank’s own reading of its exchange rate policy.

The People’s Bank of China patted itself on the back on for a job well done on the yuan in the latest quarterly monetary policy report published on Friday, saying the “two-way floating” of the yuan-dollar exchange rate was becoming more apparent.

There is an open debate about how much US pressure has forced China to take action to strengthen the value of the yuan against other currencies. Pressure from Washington was previously seen as one of the factors behind the exchange rate’s trajectory before China’s official denouncement of a US dollar peg in July 2005.

Trump rhetoric on China’s exchange rate policies began to soften soon after he formally took office this year.

The US Treasury department under the US president has twice avoided labelling China as a currency manipulator in April and October. China is, however, on a watch list along with Japan, South Korea, Germany and Switzerland because of their large trade surpluses with the US.

The yuan exchange rate issue was put on the back-burner during Trump’s visit to Beijing, even though the US president is still trying to cut a US$347 billion trade deficit with China last year.

“I don’t blame China, I blame the incompetence of past admins for allowing China to take advantage of the US on trade leading up to a point where the US is losing $100s of billions. How can you blame China for taking advantage of people that had no clue? I would’ve done same!” Trump tweeted while he was in Beijing earlier this month.

Julian Evans-Pritchard, an economist at Capital Economics in Singapore, said: “It seems to me the Trump administration doesn’t focus on currency any more. From the political point of view, the US government is happy to see the People’s Bank of China avoiding sharp [yuan] deprecation and the currency appreciating against the US dollar.”

The US’ backing for Beijing’s capital account controls to stem the flow of cash overseas and the central bank’s intervention after it persuaded the International Monetary Fund to give a nominal reserve currency status to the yuan in 2015 marked another win for China.

However, while the external pressure on Beijing to free up the yuan exchange rate is disappearing, domestic pressure is increasing, with calls for the Chinese government to be bolder in creating a market-based, floating yuan exchange rate.

Beijing says yuan policy is actually doing US a favour

Zhou Xiaochuan, China’s central bank governor for the last 15 years, said in an interview published last month that China needed to lift capital account controls and let the market, instead of the state, decide the value of a currency.

“No country can create an open economy with heavy foreign exchange controls … [and] an exchange rate set under capital account controls won’t be a true market equilibrium rate,” Zhou said.

Yu Yongding, who sat on China’s monetary policy committee when Beijing gave up the dollar peg in 2005, said at a forum last week that Beijing should seize the day to liberalise the yuan exchange rate regime as long-standing critics across the Pacific mute their voices.

“We now have the conditions for the yuan to float,” said Yu, a senior researcher at the Chinese Academy of Social Sciences.