US reverses China 'currency manipulator' label
The United States has removed the currency manipulator label it imposed on China last summer, in a sign of easing tensions between the two economic powers after nearly two years of conflict. Just two days before President Donald Trump is set to sign a "phase one" trade agreement with China, the US Treasury said in its semi-annual report to Congress that the yuan has strengthened and Beijing is no longer considered a currency manipulator. Although Treasury refrained from slapping the label on China in its report last May, Trump in August angrily accused Beijing of weakening its currency "to steal our business and factories," re-stating a long-standing grievance.
- Chinese authorities in August allowed the yuan to fall below 7 to the dollar, sending shudders through stock markets at the time and stoking Trump's ire.
- Over the summer, China took concrete steps to devalue its currency," also known as the renminbi (RMB), and those moves "left the RMB at its weakest level against the dollar in over 11 years, Treasury said.
- However, more recently it strengthened to 6.93 to the dollar. Treasury said the new trade pact addresses currency issues.
- In this agreement, China has made enforceable commitments to refrain from competitive devaluation and not target its exchange rate for competitive purposes. However that commitment is identical to the one Beijing has long made as part of the Group of 20 major global economies.
- Though the semi-annual currency report always gains attention as a key sign of relations between the powers, the currency manipulator designation was largely symbolic.
- The label calls for the US Treasury committed to work with the International Monetary Fund to "eliminate the unfair competitive advantage" created by China's alleged actions and to consult with Beijing about the matter.
- As part of the trade deal, China has also agreed to publish relevant information related to exchange rates and external balances. However, many economists questioned the decision to label China a manipulator in the first place.
- However, Treasury said Beijing still needs to take steps "to stimulate domestic demand and reduce the Chinese economy's reliance on investment and exports."
- After multiple rounds of tariffs, the US trade deficit in goods through November 2019 was running at over USD 320 billion, which is about $62 billion below the same period of 2018.
- The Treasury Department had not labeled China a currency manipulator since 1994. Beijing had recently met just one of the department's three criteria needed for such a designation - a large bilateral trade surplus with the United States.
- The currency report had eight other countries on the "monitoring list" due to concerns about their currency practices: Germany, Ireland, Italy, Japan, South Korea, Malaysia, Singapore, Switzerland, and Vietnam.
What is currency manipulation?
- Countries can weaken their currency by intervening in currency markets and purchasing U.S. dollars.
- This makes dollars more expensive and the other country’s currency weaker. Once the currency is weaker, goods from that country become cheaper on international markets, potentially providing a substantial boost to exports.
- The U.S. Treasury monitors for this behavior to determine if countries are trying to gain “an unfair competitive advantage in international trade.”
- Weakening the currency in this way is considered artificial because it is the result of government policy rather than the natural market forces of international trade and capital flows.
- In recent years, China has been the center of concerns. Policy makers from both parties have long worried that China artificially weakened its currency to make its exports cheaper on the world market, boosting its manufacturing sector.