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Comment: Who is manipulating who in this China-US currency war?



SYDNEY: The United States has labeled China as a currency manipulator. The move sent shockwaves through the markets early this week, leaving many speculation as to what might come next.

Most recognize that even though China engaged in extensive currency manipulation in the past, it no longer does, even by the US Treasury's own standards.

In fact, China has in recent years, if anything, acted to increase the value of the yuan after experiencing destabilizing capital outflows in 2015 and 2016.

For similar reasons, China truly "arms" the yuan is highly unlikely. The risk of calling for renewed capital outflow is a bigger threat to China's economy than Trump's tariffs.

  China's economy grows at its lowest rate in a quarter century

China's economy grows at its lowest rate in a quarter of a century (Photo: AFP)

SIGNIFICANT MEANING FOR 7.0 TO DOLLARS

Admittedly, the yuan has broken 7.0 to the US dollar – a level People's Bank of China (PBoC) had previously traded to defend. But there is nothing magical about the 7.0 marker, a point PBoC Governor Yi Gang has made public.

Weighted against the major trading partners (which provide a more holistic view), China's currency has weakened in recent months, but is still near where it was averaged since 2016, indicating no major misalignment.

Trump's tariffs also imply some weakening of the yuan which can be expected as the Chinese economy adjusts to weakening exports.

READ: How real is the threat of a US-China currency war? One Comment

It is also well known that designating China as a currency manipulator by itself has limited direct implications.

US Treasury Secretary Steven Mnuchin will now take Washington's case to the International Monetary Fund (IMF). But the IMF has only recently concluded that China does not manipulate its currency and would in any case only start its own consultations with China if it found that it was.

READ: Trump withdraws concerns about trade war; China warns of market chaos

  Steven Mnuchin

US Secretary of State Steven Mnuchin speaks at the Anti-Semitism Summit of the Department of Justice in Washington, DC on July 15, 2019. (Photo: AFP / Saul Loeb)

Other measures the United States could take include denying Chinese companies US government contracts and taking into account currency manipulation in trade negotiations.

In other words, the term itself lacks teeth.

A DIFFERENCE FROM OTHER INCOMPETABLE ECONOMIC CONFLICTS

Nevertheless, the move to label China a currency manipulator is significant. First, it will provide political coverage for Trump's tariffs and perhaps other forms of escalating economic conflict.

Second, Beijing's decision to allow, rather than resist moving beyond $ 7.0 to dollars, seems to reflect a willingness to thwart Trump (given his predictable reaction) and therefore also engage in escalating financial conflict even though it is not actually weapons of arms the yuan itself.

What if Trump is actually trying to directly counter China's alleged currency manipulation?

One possible way to do that would be for the US Treasury to begin implementing countervailing currency intervention – an approach proposed by economists at the Peterson Institute for International Economics for use in response to actual currency manipulation.

This would work by buying Chinese assets in the Chinese yuan to offset the value of the yuan and cancel the effects of any currency manipulation from Beijing.

WHO & # 39; S MANIPULATING WHO?

But if China has not manipulated its currency lately (something Peterson economists agree it has not done), instead of fighting manipulation, the United States would act as a currency manipulator itself.

  US President Donald Trump

US President Donald Trump, pictured here on the South Lawn of the White House last month, has accused China and the EU of currency manipulation. (Photo: AFP / MANDEL NGAN)

READ: During the trade war, China's pain is not necessarily the United States gain, a comment

The United States would simply seek to push the dollar down to gain a competitive advantage.

Not only would this be hypocritical, but if successful, it could also prove to be very destabilizing for the global economy.

The political approaches of the US president would now try to dictate the value of the world's reserve currency as most global trade and cross-border finance is rooted and to which global investors are flowing in times of uncertainty.

Also, great questions would be raised about the sustainability of the US sustained current account deficit and the willingness of world investors to continue to fund this, giving the United States the "exorbitant privilege" of borrowing as much as it wants in its own currency.

The US central bank would also remain in a bind. Trump has repeatedly asked for lower interest rates and a cheaper currency to help him win his trade war with China (and the next US election). Fed leader Jerome Powell has repeatedly asserted the Fed's independence.

But the more a populist US president destabilizes the US and global economies, the more a technocratic Fed feels compelled to offset this by lowering interest rates. A perverse relationship that unfortunately seems destined to continue.

Finally, if Trump wants a weaker dollar and shows that he is willing to act, there will be little to prevent this from becoming a reality.

Who wants to keep the US dollar after all?

Roland Rajah is director of the International Economics Program at the Lowy Institute. This comment first appeared on the Lowy Institute's blog The Interpreter. Read it here.


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