Unfounded Accusation

By Zhang Shasha

The U.S. Department of the Treasury officially designated China a “currency manipulator” on August 5. The designation followed the Chinese yuan（renminbi）， both onshore and offshore， falling beyond 7 against the U.S. dollar the same day， making Chinese exports cheaper in the U.S.

While it helped to offset the impact of the additional U.S. tariffs on Chinese exports to some extent， the depreciation was actually due to the invisible hand of the market and not the result of any deliberate act by the Chinese authorities. Chinas central bank， the Peoples Bank of China（PBC）， said the weakening of the yuan was attributable to U.S. unilateralism and protectionism as well as U.S. President Donald Trump threatening to impose an additional 10-percent tariff on $300 billion of Chinese goods.

A report by Swiss bank UBS said the market will drive the exchange rate and make the yuan drop further against the U.S. dollar if the new round of tariffs is imposed.

Chinese and U.S. chief trade negotiators held a phone conversation on August 13 and the news that the two sides agreed to talk again in two weeks shored up market confi -dence， causing the yuans value to increase.

The U.S. move came as its economy showed the effects of downward pressure. The Institute for Supply Management， a U.S.-based nonprofit educational association， announced on August 2 that the U.S. nonmanufacturing purchasing managers index unexpectedly declined to 53.7 from 55.1 in June， marking the lowest level since August 2016. According to the U.S. Department of Labor， the total nonfarm payroll employment rose by 164，000 in July， down from the previous months 288，000.

Untenable charge

U.S. Secretary of the Treasury Steven Mnuchin said he planned to “engage with the International Monetary Fund （IMF） to eliminate the unfair competitive advantage created by Chinas latest actions.”

However， the “currency manipulator”charge diverges from the IMFs economic assessment of China， Alexis Crow， leader of geopolitical investment practice at PricewaterhouseCoopers， said.

“The external position in 2018 was assessed to be broadly in line with the level consistent with medium-term fundamentals and desirable policies，” the IMF said in a staff report after concluding the annual consultation to review the Chinese economy on August 9. It is consistent with the IMFs earlier conclusion in its annual External Sector Report released in July.

The IMF report does not endorse the currency manipulator label but instead appreciates Chinas progress in reforms in reducing fi nancial sector fragilities and continuing to open up the economy.

The U.S. behavior violates its own criteria for defining currency manipulation. To be a currency manipulator， first， the country should have a signifi cant bilateral trade surplus with the U.S.， at least $40 billion. Second， it should have an overall material current account surplus that is at least 2 percent of the GDP. Finally， the country should have been consistently intervening in the foreign exchange market to keep its currency weak， with an accumulation of foreign exchange reserves that is at least 2 percent of the GDP over the preceding six to 12 months.

However， according to the IMF report， Chinas current account surplus is around 0.4 percent of its GDP， far less than the required 2 percent. Moreover， China would have to engage in one-sided foreign exchange interventions to accumulate increased reserves of around $266 billion （which is 2 percent of Chinas GDP in 2018） to be a currency manipulator.

“No such accumulation is in sight，”Jeffrey Sachs， Director of the Center for Sustainable Development at Columbia University， said in an article on CNN Business on August 6. “Chinas reserves have been stable at around $3.1 trillion for the past two years with slight ups and downs.”

“There is nothing at all to suggest any unfair currency manipulation by China，”he added. “[Trumps] tariffs have caused gratuitous and serious damage to the U.S. economy， the world economy and the global trade system.”

“Both Chinas economic fundamentals and market supply and demand support the assessment that the current renminbi exchange rate is at an appropriate level.”—Yi Gang， Governor of the Peoples Bank of China

“Neither the IMF nor the U.S. Treasury itself considers the renminbi undervalued，” Peter Drysdale， head of the East Asian Bureau of Economic Research at the Australian National University， told Xinhua News Agency.

“Letting the exchange rate edge down is in line with market pressure around the weakening Chinese economy，” he said. “The movement of the Chinese currency is in line with that of the Australian dollar， for example.”

China adopts a managed floating exchange rate regime based on market supply and demand and with reference to a basket of currencies. The PBC is committed to maintaining the rate basically stable at an equilibrium and adaptive level， the bank said in a statement released on August 6 in response to the U.S. charge.

“Both Chinas economic fundamentals and market supply and demand support the assessment that the current renminbi exchange rate is at an appropriate level，”Yi Gang， Governor of the PBC， said， adding that China will remain committed to the market-based regime， refrain from competitive devaluations， and will not target the exchange rate for competitive purposes.

“The exchange rate will not be used as an instrument to deal with trade disputes or other external disruptions，” Yi said.

According to data from the Bank for International Settlements， in the period from the beginning of 2005 to June 2019， the yuans nominal and real effective exchange rates appreciated by 38 percent and 47 percent， respectively. The renminbi has been the strongest currency among the Group of 20 economies. The size of its appreciation is also among the highest of all currencies.

Global fallouts

“If the [U.S.-China] trade war were to continue to escalate， investment， production and employment will all be affected negatively and we could expect a serious global recession with a cut in global GDP upward of 5 percent， not the modest 1-percent cuts predicted earlier，” Drysdale said.

The escalation of trade disputes between the two countries will bring considerable damage to the global economy， he said.

The Group of Seven （G7）， the grouping of the worlds most advanced countries， reached an accord in 2013 that members should consult each other before taking any major currency actions. However， the Trump administrations decision to label China a currency manipulator lacks the support of other G7 members.

German Finance Minister Olaf Scholz said in a statement on August 11， “A further escalation [of trade friction] will only do damage. Everyone should keep a level head and tone down the rhetoric a bit. ”

Katsuyuki Hasegawa， chief market economist at Mizuho Research Institute， a leading Japanese think tank， said the U.S. move would generate worldwide doubt about the continuity and predictability of U.S. policies.

“It will severely undermine international financial order and obstruct international trade and global economic recovery，”Chinese Foreign Ministry spokesperson Hua Chunying said on August 6. “It violates the multilateral consensus on the exchange rate and such wayward behavior out of unilateralism and protectionism blatantly tramples on and threatens international rules.”

She said since 2018， the U.S. has escalated the trade friction several times， but China has adhered to its principle that there would be no devaluation of the currency for competitive purposes.

“We have not used and will not use the currency exchange rate as a tool to deal with trade disputes，” Hua emphasized.