By Li Qiaoyi, Wang Yi and Zhang Hongpei
Following US President’s series actions which are leading to global trade and financial chaos, the US Treasury moved to name China a “currency manipulator” on August 5, which was denounced by China’s central bank and Chinese economists as groundless and self-destructing.
The unwarranted accusation, made after the yuan weakened against the greenback, sets the stage for the US to brandish its tariffs weapon, analysts said. They believe China would stay unaffected by US actions that would obstruct bilateral trade talks, and push ahead with financial opening.
Both the onshore and offshore yuan breached the 7 mark against the US dollar for the first time in more than a decade on Monday, August 5. The yuan’s weakness continued Tuesday.
The yuan’s daily fixing rate weakened by 458 basis points to 6.9683 against the dollar on August 6. In China’s spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.
A few hours after US President tweeted, “China dropped the price of their currency to an almost historic low. It’s called ‘currency manipulation,’” on August 5, Treasury Secretary Steven Mnuchin announced the currency manipulation designation in a statement on the Treasury’s website.
Mnuchin will engage with the IMF to “eliminate the unfair competitive advantage created by China’s latest actions,” according to the statement. The IMF has yet to comment.
There is no such issue as exchange rate manipulation, as the yuan exchange rate is by nature determined by market supply and demand, the People’s Bank of China (PBC), the country’s central bank, said in a statement on August 6.
“A capricious act of unilateralism and protectionism, it will severely undermine international rules and have material impacts on the global economy and finance,” said the PBC.
US stocks plummeted on Friday, August 5, after the US administration announced new tariffs on China. The administration wanted to deflect criticism against it by finding a scapegoat like China, labeling the latter as a “currency manipulator,” said Guan Tao, a former senior official at the State Administration of Foreign Exchange.
The Trump administration threatened to impose 10 percent in tariffs on another $300 billion in Chinese goods. China then vowed countermeasures to safeguard its core interests, saying that the country will not accept any threat and blackmail, nor “make any concessions” on issues of principle.
“The US move is random and groundless, which will not be approved by the IMF,” Guan told the Global Times on August 6.
In the IMF’s just-concluded Article IV consultation, the fund said that the yuan was broadly in line with the fundamentals, the central bank said, reiterating that China has kept its commitments of not resorting to devaluation for competitive purposes, though the US has continued to escalate the trade conflict since early 2018.
“China has never used and will not use the yuan exchange rate as a tool to deal with the trade frictions,” said the statement, reiterating the stance of PBC governor Yi Gang the previous day.
The US Treasury statement cited a portion of a post by China’s central bank on the same day to substantiate its claim that China is experienced in manipulating its currency.
The portion it quoted narrates the central bank’s push for continued innovation and the enrichment of China’s policy toolbox to fight against short-term speculative bets and stabilize market expectations, which was nonetheless claimed by the US Treasury to be an open acknowledgement of the central bank’s currency manipulating moves.
“Labeling another country a currency manipulator is unjustified. The US doesn’t have the right to make such a wanton claim,” Dong Shaopeng, an adviser of the China Securities Regulatory Commission, told the Global Times.
The US has been using this to disrupt China’s economy and financial system since 2004. “It’s a groundless frame-up and pure bullying act,” Dong said.
In May this year and October 2018, the Trump administration declined to label China a currency manipulator. China was labeled a manipulator between 1992 and 1994.
“Such a label is not consistent with the quantitative criteria set by the US Treasury itself for the so-called ‘currency manipulator,’” PBC said on August 6.
The US Treasury’s criteria to judge whether its trading partners are engaging in currency manipulation include a material current account surplus, which has been lowered to 2 percent of GDP from the previous 3 percent.
China’s current account surplus stood at 1.55 percent of its GDP in the first quarter, lower than the ratcheted-down number, according to Wu Jinduo, head of fixed income at the research institute of Great Wall Securities, citing data from China’s foreign exchange regulator.
The criteria, essentially subjective and vague, have turned out to be another US weapon together with its trade tariffs threats, but the accusation appears to be failing, said Wu.
In a note sent to the Global Times on August 6, strategists at DBS Group Research said, “Naming China a currency manipulator could open the door for US tariffs to eventually increase to more than 25 percent on Chinese goods.”
Apart from the manipulation designation, Trump’s election campaign pledge was to lift import tariffs to 45 percent on China, according to the note, estimating the risk to be skewed to the upside for the dollar versus yuan as well as the dollar versus emerging Asian currencies.
But as Lynda Zhou, equity portfolio manager of Fidelity International, said in a research note sent to the Global Times on August 6 a weak yuan, albeit likely to stem overseas expansion, should augur well for Chinese companies “as exports are still a big, albeit declining, part of the economy.”
“With the exception of some airlines and Hong Kong-listed property developers, there are few US dollar loans held by Chinese companies. So from a foreign currency debt point of view, the risks of a currency mismatch on the balance sheet are very low,” Zhou said.
The Treasury announcement on Tuesday, August 6, will give rise to market volatility, the PBC said Tuesday, adding it will cut into the recovery of the global economy and ultimately hurt US interests.
“The Chinese side urges the US to rein in its horse at the edge of the cliff, turn back from this wrong path and return to a rational and objective track,” the central bank said.
Global financial markets have taken a hit from the US’ unruly moves.
Stock markets across the Pacific recorded big losses. The Dow lost nearly 800 points to close below 26,000 points on August 5, suffering its worst trading day of the year.
“Over the short term, global markets will be mired in panic over an extension of the trade war into a currency war,” Wu said, adding that the markets would gradually calm down, although yields will decline and fluctuations would increase.
China, for its part, was advised not to overreact, Wu said, noting the nation should continue on its reform path.
In a fresh sign of China’s unswerving push for financial opening-up, global financial messaging system SWIFT launched a wholly foreign-owned entity in Beijing on August 6.
As China’s capital market is about to be fully opened, the launch of the wholly owned entity is an inevitable outcome which represents a significant milestone in SWIFT’s global development, Daphne Huang, SWIFT’s head of China, told reporters.
The new entity will denominate and pay products and services in yuan, marking the system’s acceptance of the yuan as the third global currency following the US dollar and euro, according to Huang, in a move that would help the yuan move a step further in internationalization.
Guan said the US won’t resort to specific measures immediately and the impact of China being labeled is limited. “There will be negotiations between the two countries on the exchange rate issue together with the IMF,” Guan added.
“The currency issue is likely to be a provision in the future trade pact between the two countries,” he said.