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Currency manipulator code after the yuan passes 7 level

U.S .. President Donald Trump attends a bilateral meeting with China's President Xi Jinping during the G-20 summit in Osaka, Japan, June 29, 2019.

Kevin Lamarque | Reuters

For the first time in 25 years, the US Treasury on Monday appointed China as a currency manipulator – a move that appears to aggravate a trade war that has already dragged on the global economy.

The actions of President Donald Trump's administration came after China weakened the currency, the yuan, to more than $ 7 per US dollar ̵[ads1]1; a level many analysts and investors considered important. Trump, in turn, called the slide in the Chinese yuan "a major breach."

Some analysts said that Beijing's move to weaken the yuan was clearly made in retaliation for Trump's latest tariff threat. The president announced last week that Washington will cut 10% of US $ 300 billion of Chinese goods from September 1. Going forward, the US will have introduced higher tariffs on all goods they buy from China.

For the past year, the United States and China – the world's top two economies – have been locked in a trade war that has spilled into areas such as technology and now currency. Trump's tariff threat last week came just after both sides resumed negotiations on an agreement, which some experts said has become increasingly difficult to conclude.

Beijing, for its part, appears to have "given up on trade negotiations," David Cui, head of China's stock strategy at Bank of America Merrill Lynch, told CNBC's "Street Signs" on Tuesday.

He explained that Beijing, which let the Chinese yuan slip past 7, is "a major event" signaling "a protracted conflict" between the two countries.

On Monday, the Chinese central bank officially denied that its decision to weaken the yuan is meant as a response to US tariffs.

Number 7

China has maintained a tighter grip on the yuan compared to how other major economies manage their currencies.

In recent years, Chinese authorities have loosened some controls on the currency, although the central bank – People's Bank of China – only allows the yuan to move 2% in either direction of a "midpoint" that it determines every day. PBOC is also known for its willingness to intervene in the foreign exchange market to buy or sell the yuan to keep it within a desired range.

The Chinese authorities have not allowed the currency to weaken past the 7 yuan per dollar threshold since the global financial crisis. In fact, the previous years – as in 2016 – have burned a significant portion of their foreign reserves to defend the currency from breaking this mark.

That is why currency experts have long regarded this mark as a psychologically important level. Breaking 7 yuan per dollar is a crucial development, partly because investors do not know how much more weakness PBOC is willing to tolerate, allowing them to sell investment in China to curb losses – thereby triggering significant capital outflows from the country. 19659002] One day after the Chinese yuan passed the key mark, the PBOC on Tuesday set a midpoint that would allow the currency to weaken to 7.1 against the US dollar.

"Currency Manipulator"

For several years, the United States has accused Beijing of artificially keeping the yuan weak to make Chinese exports cheaper. The administration of President Bill Clinton appointed China a "currency manipulator" in 1994.

But China has avoided that label ever since, although it had consistently featured in the "watch list" of the US Treasury's biannual review of currency practices by America's trading partners. The watchlist contains countries that have been considered justified close monitoring because they can manipulate their respective currencies.

In the last US review in May, China fulfilled only one of the three currency manipulation criteria under the Trade Facilitation and Trade Enforcement Act of 2015: Its "extremely large, sustained and growing" bilateral trade surplus with the United States

But the United States struck on Monday the label on China under an earlier law – the Omnibus Foreign Trade and Competitiveness Act of 1988. That offers "greater subjectivity" by naming a country as a currency manipulator, said Khoon Goh, head of Asia research at the Australian bank ANZ.

Under the 1988 Act, the United States would have to negotiate with China or take its case to the International Monetary Fund. Potential US penalties include:

  • Ban on Overseas Private Investment Corporation – a US government agency investing in developing countries – from funding China.
  • Exclusion of China from US public procurement contracts.

China is not a major recipient of government contracts or OPIC funding, so the currency manipulator label is mostly symbolic without "major consequences on its own," Goldman Sachs analysts said in a Tuesday report.

The escalation of the trade war

The move from the United States continues The Treasury marked further escalation in the tension between Washington and Beijing, according to analysts at Citi Research.

The analysts wrote in a Tuesday note that they expect the United States to raise the tariff for the just-announced $ 300 billion mortgage from 10% to 25% "as soon as next month." It is on top of the 25% duty already at $ 250 billion in US imports from China – which Beijing had retaliated with increased billions on billions of US products it purchases.

China imports a smaller amount of goods from the United States compared to what it exports, so the Asian country has limited products on which it can impose extra customs duties. Some experts have suggested that China could dump its huge holdings of US Treasurys, but such a move could also hurt Beijing.

"The result is that China has few good alternatives to directly strike back in the United States. As such, politicians are likely to focus on broader measures to offset duty rates," said Julian Evans-Pritchard, senior China economist at Consultant Capital Economics, wrote in a Monday note.

Allowing the yuan to be written off is one such measure. A weaker yuan makes Chinese goods relatively cheaper for overseas buyers, so that it can offset the additional fees that U.S. importers have to pay as a result of Trump's tariffs. Such a grip also makes the US dollar stronger in relative terms – which the US president has said he doesn't like.

– Reuters contributed to this report.

Correction: History has been updated to reflect the correct time frame since the United States calls China a currency manipulator.

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