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The United States Is the Real Currency Manipulator

Aug 19, 2019
  • Zhang Monan

    Deputy Director of Institute of American and European Studies, CCIEE

On August 6th, for the first time in 25 years, the United States listed China as a currency manipulator. Although the United States has considered labeling China as a currency manipulator for the past 20 years, they chose this very moment to make this decision. This leads to very important questions: why was China labeled as a currency manipulator at this time? What is the purpose of labeling China as a currency manipulator? And how will this designation affect both the current China-U.S. situation and the world economy?

The United States routinely assesses the exchange rates of major global countries. The U.S. Treasury Department supplies semiannual reports to assess if major trading partners manipulate their currencies to gain an unfair competitive advantage. It determines currency manipulators based on two U.S. bills: the Trade and Competitiveness Act of 1988 and the Trade Facilitation and Trade Enforcement Act of 2015. The two bills have different standards for what constitutes an exchange rate manipulator, with the former being more lenient and the latter more quantitative. The 2015 Act uses three criteria to determine if a country is manipulating its exchange rate: (1) having a trade surplus with the United States that exceeds $20 billion; (2) having a current account surplus that accounts for at least 2% of the country’s GDP; and (3) conducting repeated foreign exchange interventions equal to at least 2% of the country’s GPD over a period of at least half of 12 months. If the above three criteria are met, the country is designated as a currency manipulator.

In May of this year, the exchange rate assessment report adopted the standard of the Trade and Competitiveness Act of 1988 instead of the 2015 quantitative standard. The change in the evaluation criteria shows the arbitrariness and irrationality of the U.S. government. Even so, China only met the first one and did not satisfy the other two criteria. As for current account surpluses as a percent of GDP, international standard is 4%; China’s current account surplus as a share of GDP accounted for 5.9% of the international standard line, having exceeded 4% in 2005. After rising to 10% in 2007, China proactively implemented a trade balance strategy. At present, the current account balance has dropped to 0.4%, which is not only significantly lower than international standard, but also does not exceed the U.S. limit of 2%. In the foreign exchange market, following China’s exchange rate reform in 2005, the renminbi (RMB)--known as the anchor of emerging markets--moved to a managed floating exchange rate regime based on market conditions and with reference to a basket of currencies. According to the Bank for International Settlements, from 2005 to June 2019, the nominal effective exchange rate of the RMB rose by 38% and its real effective exchange rate rose by 47%, making it one of the world’s top currencies in terms of appreciation.

If you have it out for someone, you can always find an excuse to punish them. Exemplified in the case of the U.S. Treasury Department’s view that China’s central bank has not used foreign exchange reserves to intervene in the market and wants the RMB to arbitrarily depreciate, such an argument is ridiculous, confounds right and wrong, and turns the facts upside down. Therefore, the Chinese people cannot help but wonder: what is the real purpose behind labeling China as a currency manipulator at this time in the China-U.S. trade war? In fact, Donald Trump has often complained about the strong dollar since last year. Although the strong-dollar policy has been a cornerstone of successive U.S. administrations, under the mercantilist Trump administration, the appreciation of the dollar has exceeded the acceptable range for Trump. Especially amid China-U.S. negotiations, the United States hopes to promote exports through a weak dollar that will stimulate the U.S. economy.

In addition, the move is also seen as an increase in the pressure on China, upgrading the US’s toolbox to include forcing the RMB to appreciate and further adding countervailing duties on more than $500 billion in exports to the United States. Moreover, in accordance with the provisions of the aforementioned 2015 Act, the United States can restrict or prohibit American investment companies from supplying financing to Chinese companies, prohibit government procurement of goods or services originating from China, and exclude Chinese companies from the list of cooperation, and even have the option to instruct the International Monetary Fund (IMF) to start an additional rigorous review of China’s macroeconomic and exchange rate policies. On its list for discussion topics in future China-U.S. trade negotiations, the United States desires to raise issues about and demand China to open its financial markets. Therefore, in the future, similar to how in the 1980s when the United States proposed capital projects to open markets after it designated South Korea and China’s Taiwan as currency manipulators, the US will also propose conditions for China to fully open financial markets and other industries.

The unilateral actions taken by the United States have seriously undermined international rules. In the May exchange rate assessment report, in addition to including China on the watch list, it also included other major trading partners such as Japan, South Korea, Germany, Italy, Malaysia, Singapore, and Vietnam. The report expanded the countries under scrutiny from 12 countries to 21 countries and the conditions for the watch list also expanded to include five new countries. Careful analysis shows that the newly listed countries have seen a significant increase in exports to the United States in recent years. The Trump administration’s policy intention is to curb the export growth of partner countries and solve trade problems, and we cannot rule out the possibility of other countries labeled as currency manipulators in the future. Once the exchange rate is weaponized, it is bound to seriously disrupt the global financial order, worsen global financial market volatility, and further escalate global trade friction. All of this will have a significant impact on the already deteriorating world economy.

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