The U.S. Treasury has opted not to name China a currency manipulator.
Markets were watching Treasury’s semi-annual report even more closely than usual this week amid the worsening trade tensions between Washington and Beijing.
Although Treasury staff and the IMF both recommended against slapping China with the derisive “manipulator” label, that didn’t entirely rule it out. As Goldman reminded everyone earlier this month, “the criteria for being on the Treasury’s monitoring list and for receiving the ‘manipulator’ designation are related but not exactly the same.”
In other words, the door was open to some subjectivity.
Conceivably, Trump could have moved ahead with the designation in an effort to apply even more pressure on Beijing, although a decision to sear the Chinese with the manipulator brand would have been seen as a rather ham-handed political broadside – especially ahead of the U.S. midterms.
In the report, Treasury says the following about recent yuan depreciation:
Of concern, the RMB has fallen notably in recent months. Since mid-June, the RMB has depreciated to date against the dollar by more than 7 percent. The RMB has also fallen by nearly 6 percent over the same period versus a broad trade-weighted basket of currencies. The majority of depreciation against the dollar occurred between mid-June and midAugust; from mid-August through end-September, the RMB remained within a relatively narrow range of 6.8-6.9 RMB to the dollar. This depreciation of the RMB will likely exacerbate China’s large bilateral trade surplus with the United States, as well as its overall trade surplus.
On that latter point (about the exacerbation of the bilateral surplus), China has of course logged a record surplus with the U.S. for two consecutive months.
You’re reminded that the reason the yuan stabilized starting in mid-August (as noted in the excerpted passage from the Treasury report above) was precisely because Beijing moved in to arrest the slide after allowing the policy divergence between the Fed and the PBoC to push the currency weaker during the previous two months, effectively letting the yuan absorb the effects of the first two rounds of U.S. tariffs.
Once it looked like a 7-handle was right around the corner, Beijing 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)
As ever, it’s important to remember that the rapid depreciation pressure denoted by the red dashed line in the chart wasn’t due to China actively pressuring the yuan weaker. Rather, Beijing simply let the market do the work.
As the Fed hiked and Jerome Powell continued to sound a hawkish tone, perceptions of the policy divergence between the U.S. and China grew and with that, the yuan weakened. At the same time, Trump’s aggressive rhetoric stoked fears of a hard landing in China, leading to further depreciation pressure. Ironically, then, it was actually the U.S. that pushed the yuan weaker and thus watered down the effects of the tariffs.
To be fair, when you have a managed currency, doing nothing is the same as doing something, and China clearly countenanced the depreciation from late June through early August in the interest of shielding exports.
Here’s the rest of the section on the yuan from Treasury’s report:
While China’s exchange rate practices continue to lack transparency, including its intervention in foreign exchange markets and its management of daily central parity settings to influence the value of the RMB, Treasury estimates that direct intervention by the People’s Bank of China (PBOC) this year has been limited. Since the summer, the Chinese authorities have reportedly employed limited tools to stem depreciation pressures, including implementing administrative measures and influencing daily central parity exchange rate levels. Broader proxies for intervention indicate there have been modest foreign exchange sales recently by state banks, helping stem depreciation pressures, though it is clear that China is not resisting depreciation through intervention as it had in the recent past.
Based on the analysis in this Report, Treasury determines, pursuant to the 2015 Act, that China continues to warrant placement on the Monitoring List of economies that merit close attention to their currency practices. Treasury determines that while China does not meet the standards identified in Section 3004 of the 1988 Act at this time, Treasury is concerned about the depreciation of the RMB and will carefully monitor and review this determination over the following 6-month period, including through ongoing discussions with the PBOC.
So that’s that.
Or actually, no – that’s not that. That’s that as far as Treasury is concerned, but when it comes to Donald Trump’s Twitter account, you can be absolutely sure that China is still on the currency manipulator list along with every other country the U.S. trades with.
Full report2018-10-17-(Fall-2018-FX Report)