There’s something highly absurd about the notion that Donald Trump would seek to label China a currency manipulator.
After all, Trump is a man who, starting in July and continuing right up through Tuesday, has variously attempted to influence Fed policy in the interest of driving the dollar lower so as to amplify the effects of the tariffs he’s slapping on the rest of humanity.
“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollar gets stronger and stronger with each passing day taking away our big competitive edge”, Trump tweeted on July 20, just a day after telling CNBC’s Joe Kernen how displeased he is with Jerome Powell.
“Tightening now hurts all that we have done”, he continued, before insisting that “the U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals.”
Irony is dead in Trump’s America, which means we’re all supposed to simply ignore the fact that those tweets represented the President calling China and Europe currency manipulators while trying to convince his own central bank to hold off on justifiable rate hikes in the interest of driving the dollar lower. In other words, Trump was accusing other people of manipulating their currencies while simultaneously trying to manipulate his own.
Trump’s tweets demonstrate that he understands how weakness in the yuan is at least in part a product of the policy divergence between the Fed and the PBoC (i.e., not the result of an overt attempt on Beijing’s part to actively manipulate their currency). When you throw in the fact that Trump’s own fiscal policies as well as his tariffs are in no small part responsible for Fed hawkishness, you end up with a picture of a man who is driving himself insane.
The other thing you should note about the tariffs is that in addition to forcing the Fed to lean hawkish for fear of tariff-related domestic price pressures, Trump’s hardline stance on trade is also serving to dent sentiment around the yuan. That souring sentiment is the result of the market anticipating looser monetary policy in response to the deleterious effects the tariffs will likely have in terms of worsening the deceleration in China’s economy.
The point is: Donald Trump is himself largely responsible for the depreciation pressure on the yuan. China, on the other hand, has been at pains since August to support the RMB. Specifically, they reinstated forwards rules (August 3), chided onshore banks for selling RMB (August 7), moved to squeeze offshore liquidity (August 16), and reinstated the counter-cyclical adjustment factor (August 24). Here’s the annotated chart:
(Bloomberg w/ annotations)
If anything, then, China has actually tried to put the brakes on the yuan’s depreciation.
To be fair, when you have a managed currency, doing nothing in the face of steep depreciation is the same as doing something and the PBoC clearly countenanced the currency weakness from June through early August in an effort to shield the economy from the effects of the first two rounds of U.S. tariffs. Last weekend’s RRR cut is likely to add still more depreciation pressure as it serves to widen the policy divergence with the Fed.
That’s the backdrop for the Treasury’s upcoming report to Congress that could find Steve Mnuchin slapping China with the “currency manipulator” label. All of the above makes clear just how complex this issue really is, and consensus seems to be that Trump will hold fire.
But Goldman isn’t entirely sure.
“China continues to meet only one of the three criteria, but Treasury has said in the past that it will remain on the monitoring list since it constitutes such a significant part of the US trade deficit”, the bank writes, in a note dated Wednesday.
Here’s a chart that documents the evolution of the bilateral rate with annotations to show notable rhetoric from Washington and Beijing:
Goldman goes on to remind you that “the criteria for being on the Treasury’s monitoring list and for receiving the ‘manipulator’ designation are related but not exactly the same.” That opens the door to some subjectivity when it comes to applying the derisive “manipulator” label.
“Treasury must judge whether a country is manipulating its currency in order to prevent an effective balance of payments adjustment or gain an unfair trade advantage”, the bank continues, before noting that “it is therefore possible that the US could name Germany or China a currency manipulator – as President Trump has in public remarks – even though neither meets all three criteria.”
And that would be just like Trump, wouldn’t it? Have a set of criteria for applying a designation, find out that a given nation doesn’t meet those criteria, and then apply the designation anyway.
Despite Trump’s penchant for the absurd, Goldman still thinks it’s unlikely that he’ll make “official” what he’s said publicly for years. To wit:
For China, while the actual policy consequences of being named a “manipulator” are minor compared with the tariff actions the US has already taken, a formal designation should still be considered an escalation of the US-China trade conflict, in our view. Partly for this reason, it seems fairly unlikely. As Treasury Secretary Mnuchin said in August, China is currently taking action to stem FX depreciation, and that is not manipulation under the US law.
Again, I don’t think Trump cares one way or another about China’s efforts to keep the yuan from falling too far, too fast.
And boy, oh boy: Just think how riled up he can get the crowds at his pre-midterm MAGA rallies by shrieking about labeling the Chinese a gang of nefarious “manipulators”.