First, the madness over Huawei (I blogged about this here) and now, the accusation of currency manipulation – US President Donald J Trump has let the world know that the US-China trade war is far from over. But what exactly has happened with Yuan to warrant Trump’s accusation?
The Yuan fell to its 11-year low against the US dollar last week. It happened because China’s central bank set a lower than usual reference rate for its currency Yuan, and when Yuan hit a low, it didn’t intervene. Trump immediately lashed out, calling China a “currency manipulator”.
China’s Shady Past
This label (of currency manipulation) has come back to haunt China after more than two decades when in 1994, it had earned the tag and rightly so. Currency manipulation is essentially an artificially lowering of the value of a country’s currency against the US dollar, usually done to boost exports. Artifical lowering refers to the weakening of currency by policy measures rather than market forces. With weaker currency, goods and services being exported from a country become cheaper in international markets, raising the volume of exports. Such behavior is unwelcome as gains derived from artificially lowered currencies tend to provide an unfair competitive advantage to countries with weakened currencies, in global trade. China’s export-led economy today is a manufacturing hub, but not without concerns being raised over its currency manipulation in the 1990s. China is known to tightly control its exchange rate and in the last two decades, its always been around 7 yuan per dollar.
US Tariffs and Yuan
In the ongoing US-China trade war, negotiations over tariffs haven’t been going well. Last week, just before the fall of Yuan, US-China failed to arrive at a settlement on tariffs. Instead, US announced more tariffs on 300 billion dollars worth of Chinese goods. China retaliated saying it wouldn’t purchase US agricultural products. This development was succeeded by the fall in Yuan, which China said was driven by market forces. However, for a country known for its tight control over the exchange rate, this was unusual. When the Yuan was falling, China’s central bank, like several times earlier, didn’t intervene.
Here is an excellent piece on currency manipulation that I strongly recommend.
Back to the Q: Is China Manipulating Yuan?
Experts say it depends on whether China runs a huge trade surplus today and as facts stand, China hasn’t been burying foreign exchange neither does it have a large current account deficit as it used to have in the 1990s-2000s. Even US Treasury investigations have concluded for many years now that China doesn’t qualify to be a currency manipulator.
Experts have termed US’ current labeling of China merely symbolic as the tag of currency manipulator may not have huge and direct implications for either of the two parties involved. However, it’s the intent and purpose of the Trump administration in this matter that appears terrifying. Besides countless reports on China over its intellectual property and other trade practices, Trump government hs its fangs out for China with tariffs and more tariffs. This has huge implications for the global economy (I have already discussed this in an earlier post). Economists at Morgan Stanley have predicted that if the US-China trade war continues for another four to six months, the global economy will plunge into a recession in nine months.
Negotiations between China and the US, irrespective of the name-calling and labeling, seems to be the only way out. It appears that the US and China both would still like to negotiate a deal, given that plans are already underway for a Chinese trade delegation to visit the US next month. Only more trade talks will stop this trade war from getting out of hand.
Two insightful reads on the subject that I so want to recommend: