China was a currency manipulator for all of five months.
With Liu He and a Chinese delegation that will reportedly include PBoC boss Yi Gang set to arrive in Washington this week for the signing of the “Phase One” trade deal with Donald Trump, Steve Mnuchin is set to lift the derisive “manipulator” label.
The news – which crossed on Monday just before lunchtime stateside – gave the offshore yuan an extra bump. It’s through 6.89 now.
The Chinese currency had already reached its strongest levels against the dollar since August, while mainland equities are perched near two-year highs.
Treasury formally slapped China with the label on August 5, just after the PBoC let the offshore yuan breach the psychologically important 7-handle for the first time following Trump’s tariff escalation on August 1.
Global assets recoiled as the yuan careened lower in what some feared would end up being a repeat of the August 2015 episode.
The “manipulator” tag was always somewhat absurd – and not because China doesn’t control the yuan. Rather, because Trump is his own worst enemy when it comes to triggering bouts of depreciation in the Chinese currency, as is clear from the simple chart in the bottom pane of the first visual above.
“If there was ever any doubt that the currency-manipulator designation was a political tool, it’s vanished now”, Bloomberg’s Sebastian Boyd quipped Monday. In August, the IMF said there was no evidence to support the US decision to designate Beijing a manipulator.
“China also doesn’t meet the criteria outlined in a 2015 US law for formally designating a country a currency-manipulator”, Bloomberg writes, in their coverage. “Mnuchin instead relied on a 1988 trade law that has a looser definition of currency manipulation to justify the claim”.
One question worth asking as China continues to implement piecemeal rate cuts in a bid to bolster the domestic economy is whether, eventually, looser policy will manifest itself in a weaker yuan, irritating Trump. We talked at length about that possibility earlier this month.
For now, though, the yuan has appreciated steadily, likely in part because Beijing is keen to make nice with the US president ahead of the deal signing.
For the better part of two years, Trump has struggled to reconcile allegations that China deliberately pushes the yuan lower (in an effort to offset the tariffs) with the fact that during both August of 2018 and 2019, Beijing went to great lengths to prevent the currency from sliding “too” far, “too” fast.
That of course doesn’t mean the PBoC didn’t let the yuan fall in order to cushion the blow from the tariffs, it’s just to say that had the market been allowed to dictate where the yuan traded, it likely would have fallen much harder during the worst bouts of trade tension.
And therein lies the irony. The Trump administration has always been fine with China “manipulating” their currency – as long as they do it in the “right” direction.