To speak colloquially, “it’s on now”.
The Treasury department named China a currency manipulator on Monday evening, less than 24 hours after the PBoC set the yuan fix weaker than 6.90 for the first time in 2019, setting in motion a global, cross-asset train wreck that culminated in the worst day for US stocks of the year. More than $700 billion in market value vanished from US equities on the first day of the new week.
“Secretary Steve Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator”, the Treasury said, in a statement. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions”.
By “latest actions”, Treasury means the PBoC’s decision to effectively weaponize the yuan on Monday in response to Donald Trump’s latest tariff escalation, delivered by tweet on August 1.
The yuan sank through the psychologically important 7 handle to start the week, sending shockwaves across global markets. Some analysts went so far as to predict a “meltdown” akin to what unfolded in the wake of the August 2015 devaluation.
Treasury’s statement attempts to use Beijing’s words against China. Mnuchin cites the following quote from the PBoC:
[The central bank] has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behavior that may occur in the foreign exchange market.
Mnuchin calls that “an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis”. That is partly true, but simultaneously disingenuous. After all, the PBoC has very often deployed its “tools” to prevent the currency from falling in line with market forces in order to avoid irritating Donald Trump. Treasury didn’t mention that part.
As US stocks careened lower on Monday, Trump repeatedly lambasted China in a series of shrill tweets (see here and here), all of which revolved around the notion that Beijing is “manipulating” the yuan.
Chuck Schumer encouraged the president to instruct Mnuchin to make it official. “[President Trump] should finally tell his Treasury secretary to label China a currency manipulator. That’s all he needs to do to make it happen”, Schumer said, in an e-mailed statement to the press.
Well, Chuck, you got your wish.
Monday evening’s move is yet another extraordinary escalation and markets responded accordingly. US equity futures extended losses on the news, sliding another 1%.
USDJPY naturally fell, as risk-off sentiment proliferated anew and leveraged accounts sold the pair.
“The first step on the FX manipulator label is working with the IMF”, Peter Navarro said on Monday evening, adding that there are “countervailing duties the US can use”. Wilbur Ross laid the groundwork for that back in May, with what, at the time, was an under-the-radar pronouncement.
The offshore yuan fell further, moving through 7.12 as the headlines crossed.
This is going to set the mood for markets on Tuesday and that mood will be decidedly sour. This is becoming a “sum of all fears” scenario. It now appears as though there were miscalculations on all sides. Beijing seems to have underestimated Trump’s penchant for using trade threats as a tool to compel Fed easing and Trump seems as though he might have assumed Beijing wouldn’t dare hit back so forcefully and so quickly.
It would be tempting to suggest that the White House might have misjudged how ferocious the global equity rout would be were China to retaliate using one of its so-called “nuclear options”, but then again, the fact that Trump was willing to chance another acute selloff by hitting Beijing with the manipulator label is a testament to the US president’s penchant for throwing caution to the wind.
Whatever the case, markets are likely in for another tumultuous day, and everyone will be holding their breath to see how the PBoC responds.
Full statement from Treasury
Washington – The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to analyze the exchange rate policies of other countries. Under Section 3004 of the Act, the Secretary must “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator.
As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.
As noted in the most recent Report to Congress on the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States (“FX Report”), China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market. In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.
The Chinese authorities have acknowledged that they have ample control over the RMB exchange rate. In a statement today, the People’s Bank of China (PBOC) noted that it “has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behavior that may occur in the foreign exchange market.” This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis.
This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation. As highlighted in the FX Report, Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China’s exchange rate for competitive purposes. Treasury continues to urge China to enhance the transparency of China’s exchange rate and reserve management operations and goals.