The Trump administration labels China a currency manipulator

ON AUGUST 5th the Trump administration deployed another weapon in its fight with China: name-calling. After some grousing on President Donald Trump’s twitter feed, the Treasury officially designated China a currency manipulator. The Chinese government stands accused of devaluing its currency in order to gain an unfair advantage in international trade. It is the first time the Treasury has made such an accusation in over 25 years.

What motivated the Trump administration’s claim was that the Chinese yuan has been falling in value against the dollar, and on August 5th dropped past the psychologically significant value of seven to the dollar for the first time in over a decade. The People’s Bank of China (PBOC) also tends to keep a close eye on its value, intervening on occasion to lean against the wind of market pressure.

But a closer look at the facts reveals that the Trump administration is more than a bit muddled. China has in fact been wary of large depreciations, for fear both of scaring people and of provoking international ire. Moreover, towards the end of last year China’s authorities were intervening not to try to weaken the yuan, but rather to prop it up. After the Trump administration’s announcement of tariffs on August 1st added extra pressure towards devaluation, it seems that the PBOC chose to let market forces work. The policymaker most obviously intervening to push the yuan down against the dollar is Mr Trump himself.

The IMF, which monitors countries’ external imbalances, recently concluded that China’s external position was broadly in line with fundamentals. Even by the Treasury’s own formal criteria, China does not seem to be a currency manipulator. To qualify under the Treasury’s “enhanced monitoring” system, a country has to have a significant bilateral trade surplus with America and a material current-account surplus, and to have made a “persistent, one-sided intervention in foreign-exchange markets”. Mark Sobel, a former official who oversaw the Treasury’s currency-manipulator monitoring for 14 years, and is now at the Official Monetary and Financial Institutions Forum, a think-tank, notes that China meets only the first of those three conditions.

It is true that calling out currency manipulators has always been a political exercise. But usually politics has pushed the other way. When China was more clearly manipulating its currency in the 2000s, officials at the Treasury feared that a formal label could risk a trade war. And despite its political overtones, Mr Sobel defends the Treasury FX Report as a document with “analytic integrity”. Now, he says, “that has been thrown to the wind”. It seems that the Trump administration has hijacked the definition of currency manipulation to poke the Chinese as part of its trade war.

In the medium-term, the name-calling may not lead to much. For American law is tougher in identifying currency manipulators than in punishing them. The law says that Mr Trump could direct the federal government to stop buying stuff from China, or he could refuse to do a trade deal with them. The formal announcement said that the administration would engage with the IMF “to eliminate the unfair competitive advantage created by China’s latest actions”. None of this will leave China quaking in its boots.

Investors will probably do enough quaking for them, as they worry about what could come next in the tit-for-tat between the two countries. Their inboxes were already full of analysts’ notes speculating about whether currency intervention by the Treasury could be next. If Mr Trump is dissatisfied by the dollar’s strength, perhaps he might direct the Treasury to buy foreign currencies, including perhaps the yuan, where available, to force down the dollar’s value. Or perhaps continued yuan depreciation could lead to yet more tariffs. Whatever happens, investors are not enjoying themselves. The announcement came after the worst day of trading on the American stock market in 2019. Expect nerves to stay shredded for a while.