Is China a Currency Manipulator?

On August 5, 2019, Trump administration labelled China as a currency manipulator. What does it mean and why does it matter?

The relative value of currencies makes the difference when countries trade. Weakening a currency is to lift exports. Some economists believe China’s economic transformation has led the loss of at least a million U.S. jobs in the manufacturing sector, over a period of 10 years (2003-2014). A cheaper currency then helps Beijing to offset much of the pain of recently imposed U.S. tariffs. China has several ways of managing its currency but uses two primary tools – the central bank’s daily reference rate and/or buy or sell U.S. dollars.

Did China manipulate?

It depends on who you ask. Economists define manipulation as when a country with an overall trade surplus buys foreign currency to keep its currency from rising in value. That helps the home country’s exporters. On this definition, China is not a manipulator. The 2015 Trade Enforcement Act sets out three criteria to be tagged as a manipulator:

     (i)         bilateral surplus with the U.S.;

   (ii)         an overall current account surplus; and

  (iii)         a one-sided intervention in the forex market

U.S. Treasury’s latest report concludes that China has only met (i). So manipulation requires intervention in the forex market. Domestic interest rate changes do impact currency value but their primary impact is on cost of borrowing and return on saving.

So what happens to China’s label? Nothing much. China may negotiate how to make its currency more fairly valued with the U.S. and IMF. The IMF only recently determined that China’s currency was fairly valued. So the negotiation may not go very far.

What is Wrong with Trump and Trade?

Trump is obsessed with bilateral trade deficits with China. This to him is “losing” billions to trade partners. But the “lost” dollars flow back to the U.S. as investments – stocks, start-ups and higher-level manufacturing. Then again, exchange rates adjust trade flows. So Trump’s case defies international economics and finance. New books have to be written on mercantilism! And David Ricardo will be glad!

Reference:

Ana Swanson, The U.S. Labeled China a Currency Manipulator. Here’s What It Means www.nytimes.com

Brad W. Setser, Is China Manipulating Its Currency? www.cfr.org

Matthew Yglesias, Trump’s designation of China as a currency manipulator, explained www.vox.com