China has today given an apparent respite from its currency. The yuan remains stable, still at seven units per dollar –its lowest level in 11 years, which went down this Monday-, but has not registered important movements. The People's Bank of China (BPC) expressed this morning its "firm opposition" to the "unilateral" decision of the US Department of the Treasury of designating the Asian giant as "currency handler". He said that this process "will seriously undermine the international financial order" and "will trigger turbulence in the financial market." However, he has also assured that "China remains committed to the exchange rate" of its currency and will ensure that it is "stable" and "balanced."
The Asian markets, after the turbulent day of yesterday by the decision of China to challenge Donald Trump and his tariffs with a drop in his currency, registered important falls. But nevertheless, the European stock exchanges have opened calmly and even with slight increases and the Americans have woken up with a rebound of more than 1%, although it has been softening.
The United States announced Monday night that it would designate China as a "currency manipulator country," something that had not happened since 1994. That stirred all fears that the trade war has already become a currency war. The Trump Administration has chosen Tuesday to show firmness, but also to soften the outlook.
Larry Kudlow, the president's chief economic advisor, has appeared and insisted that the rules governing international trade must be respected by all countries. "We must act if they violate our laws, those of the World Trade Organization and the G20 agreements," he warned the decision to designate China as the country that manipulates its currency, "currency devaluations are unfair." However, the White House, at the same time, tries to calm the emotions following the two surprise actions announced by the Republican in recent days. "The president has said many times that he wants to negotiate," Kudlow says, while saying he expects the Chinese delegation to travel to Washington in September to resume discussions, "but he is not happy with the progress."
"Flexible" before a round of contacts in September
He also suggests that the president is flexible regarding the application of the new round of tariffs, scheduled for September 1. "Things can change," he said. Kudlow says the entire economic team supports Trump in the battle with China. "These things are not simple," it was justified by referring to the measures being taken to correct trade imbalances.
Goldman Sachs assumes that the US and China will not be able to resolve their differences before the 2020 presidential elections, where Donald Trump expects to be re-elected. The leaders of the two powers, they point out from the bank, are adopting an increasingly hard line. Fidelity believes that this maneuver "opens the door to a currency war" and further elevates the pressure on the trade front.
The president of the United States has the ultimate authority over the dollar. Donald Trump knows this and proceeded to exercise his power, formally accusing China of manipulating his currency. It is the first time in 25 years that this defensive measure is adopted. The Republican's action was clearly deliberate and caught Wall Street by surprise, as he also did on Thursday with the tweet escalating the tariff war on all products arriving from the Asian country.
Manipulative countries and other suspects
Currency manipulator is one of Trump's favorite accusations since the election campaign. He also used it against the European Central Bank, for the depreciation suffered by the euro and criticizing its monetary laxity. The devaluation of a currency, as the Republican denounces, allows them to compensate the impact of tariffs and thus be able to reduce the value of their exports so that they are more competitive. However, until this Monday there had been no formal accusation against China.
The US Treasury publishes a report every six months in which it analyzes the exchange policies of its trading partners. He has been doing it for two decades. The most recent is last May. The document insists that the Trump administration is working "actively" to dismantle trade barriers. That, he says, includes "combating unfair practices" in currencies.
The document already indicated that "I was following very closely" the development of the Chinese exchange rate and noted that it had depreciated 8% during the last year. He also accused a "lack of transparency" by the Chinese central bank regarding the interventions it makes in the market. And he denounced the appeal by Beijing to subsidies and other economic practices that distort trade.
Washington in recent reports avoided putting China on the list of manipulative countries despite these warnings and Trump's repeated accusations in public. This Monday's announcement, therefore, was made outside the report, which shows what the Republican's intentions are. By cataloging China as a manipulative country, you can adopt specific sanctioning actions in trade.
China was already declared as a currency manipulator country in 1992 and 1994. It also did so in the past with South Korea and Taiwan. And until now, it was included only in the list of countries "under surveillance", which also include Japan, South Korea, Germany, Italy, Singapore, Malaysia and Vietnam. It was also indicated in the last report that he was going to follow closely the situation in Switzerland and India, which fell from the group.
What does it mean to be a currency manipulator?
The US Treasury follows three basically three criteria to determine that a country manipulates its currency. The first, which has an "extremely large" trade surplus. It was estimated last year at 419,000 million dollars. The evolution of the balance of payments surplus also follows. And at the same time the movements in the exchange rate are controlled for six months.
Once a country has been designated as a manipulator, the International Monetary Fund is requested to take actions to end this distortion. The agency must first analyze the situation in an objective way. In the last report on the foreign sector published three weeks ago, he pointed out that the dollar was overvalued but also said that the yuan was in line with the fundamentals.
The IMF indicated that China's balance of payments surplus grew slightly in 2018, to the equivalent of 1.7% of GDP. The financial institution thus includes the Chinese economy among countries with excessive surplus, a list in which Germany, South Korea, Holland, Sweden and Singapore also appear. The US has an excessive deficit, that is, it borrows excessively.
What remains to be seen now is to what extent President Trump would be ready in full fury to intervene directly in the foreign exchange market, resorting to the stabilization fund that the Treasury has. Analysts now see it more as a rhetorical weapon and consider that the qualification of the manipulative country reinforces the message in the face of commercial negotiation.
China denies the accusation
For its part, the People's Bank of China (BPC) has expressed its "firm opposition" to the "unilateral" decision of the US Department of the Treasury. In a statement, it has defended on Tuesday that the data of the Bank for International Settlements (BPI) between 2005 and 2019 confirm that the effective nominal exchange rate of the yuan has appreciated 38%, while the real effective exchange rate of the Chinese currency has increased by 47%, adding that the IMF analysis considers that the yuan exchange rate is generally aligned with its fundamentals.
"Regardless of the facts, the United States has designated China as a currency handler. China strongly opposes such an act, as it harms the interests of China and the United States. It will be serious, undermine the international financial order and lead to the volatility of the financial market, it will also be an international trade barrier, it will affect the recovery of the world economy and, ultimately, it will harm the interests of the United States, "he criticized. "This unilateral act has undermined the multilateral consensus and has had a negative impact on the international monetary system. China urges the US to curb its horse at the edge of the cliff, to back down this wrong path and return to a rational and objective path ", he has requested in a graphic message, which ends up ensuring that they, in turn, will maintain the stability of the yuan.
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