The US is officially accusing China
of currency manipulation after the US Treasury announced a sharp fall in the
value of the Chinese yuan against the dollar.
The Chinese yuan drop caught markets
off-guard as Beijing usually supports the currency.
Last week, China pledged to
retaliate after President Donald Trump vowed to impose 10% tariffs on $300 billion
of Chinese imports.
On August 5, the yuan passed the
seven-per-dollar level for the first time since 2008, prompting President Trump
to accuse China on Twitter of manipulating its currency.
He
tweeted: “Based on the historic currency manipulation by China, it is now even
more obvious to everyone that Americans are not paying for the Tariffs – they
are being paid for compliments of China, and the U.S. is taking in tens of
Billions of Dollars! China has always….
“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 US Treasury department defines
currency manipulation as when countries deliberately influence the exchange
rate between their currency and the US dollar to gain “unfair competitive
advantage in international trade”.
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with
foreign currencies.
On August 5, the People’s Bank of China (PBOC) said the slump in the yuan
was driven by “unilateralism and trade protectionism measures and the
imposition of tariff increases on China”.
The US government said Treasury Secretary Steven Mnuchin will now engage
with the IMF “to eliminate the unfair competitive advantage created by
China’s latest actions”.
The move is largely symbolic because the US is already engaged in trade
discussions with China and has implemented tariffs on the country’s imports.
However, it fulfills a presidential campaign promise by President Trump who
pledged to name China a currency manipulator on his first day in office.
The decision rattled investors, with Wall Street’s main stock market indexes recording their worst trading day for 2019. Asia markets extended losses on August 6, with the Shanghai Composite down 1.3% in afternoon trading.
According to a People’s Bank of China report, the country’s foreign currency reserves plunged by $99.5 billion in January 2016.
China has been running down its vast foreign currency reserves in an attempt to boost the value of its own currency, the yuan, and stem a flow of funds overseas.
At $3.23 trillion, China still has the world’s biggest reserve of foreign currency holdings.
However, that has declined by $420 billion over six months and stands at the lowest level since May 2012.
The Chinese authorities fear a rapid devaluation of their currency, as it could destabilize the economy.
Many Chinese businesses hold debt in dollars and managing those debts with a severely weakened yuan could cause problems and some companies to fail.
China has been trying to engineer an ordered devaluation of the yuan, but that is proving hard to deliver.
Investors have been trying to pull funds out of investments priced in yuan and speculators have been betting on further falls in the currency.
To stabilize the situation, China has been selling dollars and buying yuan.
China has been using other tactics, including curbing currency speculation and ordering offshore banks to retain their reserves of yuan.
China’s currency, the yuan, will join the IMF’s group of international basket of reserve currencies, the Fund is expected to announce on November 30.
Just the US dollar, the euro, Japan’s yen and the British pound are currently part of this select band.
Earlier this month, IMF Managing Director Christine Lagarde backed the yuan’s inclusion.
If the decision is made, the yuan is likely to join in 2016, experts said.
China is the world’s second largest economy behind the US and asked for the yuan to become a reserve currency in 2014.
Reserve currencies are used by central banks and other financial organizations to help pay down international debt and steady exchange rates.
Photo WSJ
The last change made to the basket was in 2000, when the euro replaced the German mark and the franc.
If Beijing’s wish is granted on November 30, some analysts have suggest that by 2030 the yuan will become one of the top three major international currencies, together with the dollar and the euro.
Concerns about Beijing keeping the yuan artificially low to help exporters is one reason the currency has previously failed to meet the criteria for reserve currencies set out by the International Monetary Fund.
However, Chinese officials have a made a concerted effort to build support for the yuan’s inclusion, and a recent IMF staff report endorsed such a move.
Initially, the yuan’s inclusion would be largely a symbolic gesture, some analysts have said.
They have also said the yuan’s ongoing inclusion in the basket would depend on whether China continues its financial reforms.
Chinese stocks were flat on August 14 as the central bank raised the trading range of the yuan.
China’s central bank set the yuan rate at 6.3975 per dollar compared to Thursday’s close of 6.3982.
The rate is set daily and allows a 4% fluctuation – over the past week, the bank had guided the yuan to a record low sparking fears of a currency war to help lagging Chinese exports.
The benchmark Shanghai Composite was flat at 3,947.47 points.
Following the mainland’s lead, Hong Kong’s Hang Seng also remained unchanged, trading flat at 24,005.92.
Japanese shares traded lower with the Nikkei 225 index closing 0.4% lower at 20,519.45 points.
Investors are anticipating next week’s release of Japan’s economic growth for the past three months.
In Australia, the S&P/ASX 200 also fell by 0.5% finishing at 5,360.90 points as investors took a cue from Wall Street’s flat close and the ongoing uncertainty over the yuan.
China’s currency is important to Australia as it is the main export market for the country’s natural resources.
In South Korea, the Kospi index remained closed on August 14 as the country will mark a national holiday on August 15.
The Chinese yuan has been devalued to its lowest rate against the US dollar in almost three years.
China’s central bank said the move was a “one-off depreciation” of 1.9% in a move to make the exchange rate more market-oriented.
It comes in the wake of a string of weak economic data from the world’s second largest economy.
At the weekend, China reported a sharp fall in exports and a slide in producer prices to a near six-year low in July.
Exports fell by 8.3% in July, far worse than expected and the producer price index was down 5.4% from a year earlier.
Photo Reuters
The midpoint for the yuan is now set at 6.2298 to $1, up from 6.1162 yuan on August 10.
The People’s Bank of China (POBC) manages the rate through the official midpoint, from which trade can rise or fall 2% on any given day.
Until now, it had been determined solely by the central bank itself.
Making the rate more market-based will mean the midpoint will now be based on overnight global market developments and how the currency finished the previous trading day.
The POBC’s move comes amid speculation that China is preparing to widen the trading band for the currency from the current two percent range.
China has long kept tight control of the yuan value on concerns over financial volatility and losing its policy control.
Yet it is also under pressure to reform its currency policy as it pushes to become one of the International Monetary Fund’s “special drawing rights” (SDR) reserve currencies.
These are currencies which IMF members can use to make payments between themselves or to the Fund.
Asian equities outside of China slipped on the news as investors weighed the implications of the surprise move.
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