When the Trump administration labeled China a currency “manipulator” this week in the wake of the PBoC’s decision to hit back at the latest US tariff threats by letting the yuan weaken past the psychologically-important 7 threshold, Steve Mnuchin doubtlessly knew the move was counterproductive.
Why? Simple: Over the course of the trade war, Beijing has sought to prevent excessive yuan weakness, not encourage it.
It’s true that the currency has depreciated quite a bit over the last year and it’s true that the depreciation has helped offset the tariffs, but as everyone (including CNBC’s Sara Eisen) knows, it’s impossible to separate the “natural”, market-based depreciation that invariably accompanies expectations of a tariff-related economic hit to an export-heavy economy from deliberate attempts to engineer currency weakness in order to offset that expected hit.
The US administration attempted this week to suggest the PBoC’s promises to keep things from spiraling out of control (communicated on several occasions) are “proof” that Beijing “manipulates” its currency.
But that ignores the rather obvious fact that the messaging from China’s central bank was clearly designed to avert a follow-on panic after Monday’s cross-asset turmoil. That is, Beijing was conveying its (strong) desire to “leave it at that” (so to speak) after sending a warning shot.
Unfortunately for the administration, the reality of this situation is becoming all too clear for a wider and wider audience of market observers. Wall Street has, of course, documented this exhaustively over the past nine or so months and the issue for Trump is that the mainstream financial media is starting to cite that research.
“Do you want to see China allow its currency to free float?”, an inquisitive Wilfred Frost asked Peter Navarro on CNBC Friday. “Because almost every analyst suggests that would see the [yuan] weaken from here, not strengthen”.
This has been backed up all week by many of those same analysts. Take Credit Suisse’s Kasper Bartholdy, for example, who weighed in amid the tumult.
“We think the Chinese authorities deliberately kept USDCNY in a range of 6.85-6.95 between mid-May and the end of last week in deference to the mythological significance of the 7 threshold, and we think they did so in the face of market depreciation pressure on the yuan”, he said, in a note, adding that although the Trump administration labeled China a currency “manipulator”, “it seems probable to us (and seemingly to most other commentators as well) that USDCNY would have moved past 7 months ago if it had truly been left to its own devices”.
It would be difficult to put it any more succinctly than that. Indeed, there’s a certain charming flatness in the delivery and cadence there.
Have a look at the following chart, which shows that Beijing has habitually leaned against depreciation pressure over the past four months, especially over the last several sessions.
Credit Suisse’s Bartholdy goes to suggest that under an actual free float, the yuan would be “much” weaker. Considering the fact that the depreciation which has unfolded over the past year has largely offset the tariffs, a free floating yuan would have likely gone even further in that direction.
“To the extent the Chinese authorities have engaged recently in manipulation of the USDCNY exchange rate, such manipulation has constrained rather than added to the CNY’s weakening against the US dollar”, Credit Suisse goes on to say. “So it is not clear to us that the US administration’s labeling-exercise is consistent with the administration’s own craving for CNY strength”.
Ironically, then, China has been the Trump administration’s best friend when it comes to preventing the very same kind of currency depreciation that the US president claims Beijing is encouraging.