On Monday, the Treasury Department announced that it had declared China a currency manipulator, following the yuan plummeting to a 10-year-low against the dollar. Voice Of America reported Monday, “China let the yuan weaken past the key 7-per-dollar level on Monday for the first time in more than a decade and later said it would stop buying U.S. agricultural products, inflaming a worsening trade war with the United States.”
VOA added, “The sharp 1.4% drop in the yuan comes days after U.S. President Donald Trump stunned financial markets by vowing to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1.”
The Treasury Department released a statement noting that the Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to analyze the exchange rate policies of other countries and determine whether a country is manipulating the rate of exchange with the United States for the purpose of “preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
Philip Wee, a currency strategist at DBS Group Holdings Ltd. said, “Trade and currency wars are escalating by the day. Naming China a currency manipulator could open the door for U.S. tariffs to eventually increase to more than 25% on Chinese goods.”
Treasury Secretary Steven Mnuchin is set to work with the International Monetary Fund to eliminate the unfair competitive advantage that China has precipitated. The statement continued:
As noted in the most recent Report to Congress on the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States (“FX Report”), China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market. In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.
The statement points out that the Chinese government has acknowledged they control the RMB exchange rate, and the People’s Bank of China (PBOC) acknowledged it “has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behavior that may occur in the foreign exchange market.”
The statement concludes, “This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation. As highlighted in the FX Report, Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China’s exchange rate for competitive purposes. Treasury continues to urge China to enhance the transparency of China’s exchange rate and reserve management operations and goals.”
Hours after the Treasury Department’s announcement, the People’s Bank of China set the daily currency at a stronger level and announced it would sell yuan-denominated bonds in Hong Kong. Bloomberg reported, “The PBOC (People’s Bank of China) set its daily reference rate at 6.9683 per dollar, stronger than the 6.9871 level forecast in a Bloomberg survey of 19 traders and analysts.”
The United States last named China a currency manipulator in 1994.