The irony of calling China a currency manipulator

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The U.S.-China trade tensions have been running hot, but the feud was taken to the next level when the U.S. Treasury Department labeled China as a currency manipulator late Monday.

This comes on the heels of China’s central bank, the People’s Bank of China’s (PBOC), allowing the value of its yuan to weaken to 7 per dollar. The event followed President Donald Trump’s announcement that the U.S. would be slapping 10% tariffs on the remaining $300 billion worth of Chinese goods effective September 1.

However, the U.S. Treasury’s decision to designate China a currency manipulator is more about sending a message, and if anything, the yuan would’ve been even weaker without policy support, according to Capital Economics Senior China Economist Julian Evans-Pritchard.

“Ironically, the recent weakening of the renminbi was triggered by the PBOC halting its efforts to defend 7.00 against the dollar and allowing market forces to push the currency down,” Evans-Pritchard said in a note to clients Tuesday. “The US Treasury’s argument that China is manipulating its exchange rate to ‘gain an unfair competitive advantage’ is a bit of a stretch.”

The U.S. Treasury’s most recent foreign exchange report noted that China only met one of three criteria for being labeled a currency manipulator. There was no evidence to support the claim that China had been intervening to push down the value of the yuan. The PBOC also released a statement stating that China does not engage in “competitive devaluation” and adheres to a market-determined exchange rate system.

CHINESE 100 YUAN NOTE IN SHAPE OF JIGSAW PUZZLE FALLING APART
CHINESE 100 YUAN NOTE IN SHAPE OF JIGSAW PUZZLE FALLING APART

Nevertheless, “facts matter less than optics at this stage. By explicitly badging and timing the renminbi’s breach through 7.00 as a response to US tariff threats, the PBOC has given credence to the idea that it is weaponizing the currency,” Evans-Pritchard argued.

As the trade war further escalated to a currency war, the U.S. Treasury’s next steps either have to involve direct negotiations with China or indirect negotiations through the International Monetary Fund (IMF). Evans-Pritchard explained that China is unlikely to engage in talks with the IMF, and thus, the U.S.-China relationship will likely sour even more.

“With no off-ramp in sight, we continue to think that Trump will eventually place a 25% tariff on all imports from China. Meanwhile, China is likely to consider additional countermeasures, including further currency depreciation,” Evans-Pritchard said.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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