U.S. labeling China currency manipulator could backfire, experts say

'Their incentive to carry out any negotiations is seriously undermined.'
Image: U.S. Markets Open One Day After Dramatic Losses
Traders and financial professionals work at the opening bell on the floor of the New York Stock Exchange (NYSE) on Aug. 6, 2019.Drew Angerer / Getty Images

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By Martha C. White

Experts in international trade and monetary policy are skeptical of the U.S. Treasury’s claim that China is manipulating its currency, and say the accusation only adds fuel to the simmering trade dispute that has weighed on global growth and equity markets.

“President Trump’s labelling of China as a ‘currency manipulator’ is likely to inflame and intensify already fraught relations between the two world’s largest economies,” said Nigel Green, founder and CEO of the deVere Group.

On Monday, the Chinese yuan, also called the renminbi, crossed the symbolically significant exchange rate of seven to the U.S. dollar. In a statement issued Monday, Treasury Secretary Steven Mnuchin accused China of trying “to gain unfair competitive advantage in international trade.”

The declaration could be a pretext for additional sanctions against Chinese goods and businesses. "In practical terms, the actions this week can be expected to pave the way for more sanctions to be imposed on China from the U.S.,” Green said.

Trump has accused China of manipulating its currency since he was on the campaign trail. He promised to make such a declaration on “day one” after his election, but had not done so.

As such, some experts saw a political motive for Monday’s pronouncement.

“They get to satisfy the President,” said Nicholas Lardy, a senior fellow at Peterson Institute for International Economics.

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“There are technical requirements to be called a currency manipulator under the law… and it does not appear that China has met those requirements,” said Craig Allen, president of the U.S.-China Business Council. “There’s no magical formula to say what is an overvalued or undervalued currency.”

Mnuchin said the U.S. would engage with the International Monetary Fund “to eliminate the unfair competitive advantage created by China’s latest actions,” but there is no indication that the organization would side with its conclusions.

“It could well be that the I.M.F. will come to a different conclusion than the Treasury and Trump,” Lardy said.

Contrary to Treasury Department’s assertion that China has been actively driving down the value of its currency, the reverse has been taking place, Allen said. Beijing has been propping up the value of the yuan as the trade war and other factors have taken a toll on its economy.

“The Chinese government has been active in supporting the renminbi, not devaluing it,” Allen said.

But by allowing that support to be removed and letting the renminbi drop, China showed its cards—that it's within its power to influence the currency's strength or weakness.

There are a number of supportive measures available to Chinese policymakers, including setting the starting rate for daily trading of the yuan, selling yuan-denominated financial instruments and tightening capital controls to prevent market flight. Experts theorized that Beijing temporarily might have backed off those supportive measures, causing the yuan to fall against the dollar. On Tuesday, its value rose incrementally, edging back above seven.

If China did influence value of its currency, it was more likely motivated by ongoing protests in Hong Kong than trade tensions with the U.S., said Jamie Cox, managing partner at Harris Financial Group.

“If this spills over into mainland China, it would definitely make their economy suffer,” he said. “It’s bigger than the trade situation. They’re concerned about their economy at large.”

And if the Trump administration’s declaration was a gambit to bait China into more drastic measures, the move backfired, Cox said.

“The Chinese basically didn’t bite. The President came back and labeled them a currency manipulator. A logical conclusion would’ve been for them to devalue more, but that’s not what they did,” he said.

Being able to paint Trump as the bully gives China a moral high ground that hurts America’s standing on the world stage, Lardy said. The combination of the currency accusation and the imposition of tariffs — following a promise not to at the G20 Summit — gives them plenty of ammunition, Lardy said. “Trump has taken a preemptive action in violation of his previous pledge to Xi.”

This gives the Chinese trade delegation less motivation to reach an accord, despite the economic costs. “Their incentive to carry out any negotiations is seriously undermined,” he said.

But by allowing that support to be removed and letting the renminbi drop, China showed its cards that it's within its power to influence the currency's strength or weakness.