US Treasury Secretary Steven Mnuchin designated China a currency manipulator this evening, less than a day after the renminbi-dollar exchange rate fell below a key psychological threshold against the dollar for the first time since 2008.
An official statement from the Treasury said, “Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions” but did not spell out any further consequences. Countries designated as manipulators may be subject to tariffs and other penalties, but these are not mechanically applied – meaning that any additional sanctions ultimately arising from today’s declaration remain largely unknown.
President Trump hinted at the action this morning, sending a tweet saying, “China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
The offshore renminbi fell toward the bottom of the trading range established this morning – which, if sustained, would further erode the impact of Mr. Trump’s latest series of tariffs.
Investors have sold the US dollar through the day, betting that a ratcheting up in global trade tensions will push the Federal Reserve into executing three or more interest rate cuts by the end of next year. Traditional safe havens like the Swiss franc and Japanese yen are seeing steady inflows.
In justifying its determination, the Treasury Department cited the Omnibus Trade and Competitiveness Act of 1988, saying that the Secretary must “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
More recent US law requires that the Treasury assess major trading partners for currency manipulation using three criteria: bilateral trade surpluses, current account balances, and intervention in the foreign exchange markets. Under the May 2019 Treasury report, a goods surplus exceeding $20 billion, a current account balance exceeding 2% of gross domestic product, and persistent, one-sided intervention in currency markets for more than 6 months in a year are collectively considered sufficient to trigger the designation.
China is believed to meet two of these criteria at the moment, in running trade and current account surpluses above the Treasury’s thresholds.
But the irony is that the renminbi has fallen because China has stopped manipulating its value upward. After spending several decades keeping it down, the People’s Bank of China is widely understood to have supported the currency over the past three years through a combination of verbal jawboning, influence over the official fixing methodology used to set trading ranges, purchases through state-controlled financial institutions, and outright intervention. In stepping back from currency markets this morning, officials allowed markets – which normally act to devalue countries suffering trade tensions – to put downward pressure on the exchange rate.
The Treasury Department seemed to acknowledge this contradiction, saying, “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.”
In essence, the US Treasury is calling China a “currency manipulator” for not using its reserves to manipulate its currency.
Wars are never really rational, but this one is raising the level of absurdity to new heights.
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