Currency manipulation – the theory and the practice

Soon, the US Department of Treasury will be releasing its six-monthly report on currency manipulation. It establishes to what extent the USA’s major trading partners have gained an advantage by unfairly influencing their currencies. In light of the current trade dispute, the report will no doubt attract even greater attention than usual. If the mere amorphous fear of a further trade-conflict escalation led last Wednesday to strong price falls on the US stock exchanges, then imagine how explosive the ultimate challenge to China on the currency front could potentially be. President Trump does not disguise what his stance on China is; if it were only up to him, then China would already have long since been officially branded a currency manipulator. However, forex issues and thus the report in question do not lie in his hands but in those of the Treasury, and the latter applies a clearly defined, quantitative list of criteria, where the focus is not on “felt” disadvantaging but on unequivocally quantifiable aspects. The US Treasury assesses whether a country:

» has a “significant” bilateral trade surplus with the USA, whereby “significant” is defined as greater than USD 20 billion.

» has a “material” current account surplus with the rest of the world, whereby the threshold for “material” is set at more than 3% of GDP.

» and has persistently and one-sidedly intervened in the foreign exchange market, with a limit of 2% of that country’s GDP over a period of 12 months.

If the US side claims that China regularly violates intellectual property rights, flouts fundamental human rights, and inflates its economy with inappropriate subsidies, or questions the basis for the “Made in China 2025” industrial policy, then these are objections to which we can subscribe. And as regards the last decade we would have wholeheartedly backed the objection that China was impermissibly influencing the exchange rate by massive interventions with the objective of promoting the Chinese export sector. However, times have since changed. Is the Yuan not at present being massively devalued? Yes it is, but it bears remembering that not every devaluation is consciously caused by economic policy and an inappropriate “competitive devaluation”. Public opinion on China is probably first and foremost defined by the USD-CNY exchange rate, and a drop of 10% within only six months spells a tough objection. However, given the greenback’s global strength the Yuan is not alone here. A closer look at the data reveals that the devaluation in China’s currency (depending on the peer group chosen) was either far less than that of comparable currencies or at least at exactly the average rate, meaning it certainly does not catch the eye for being especially negative.

Nevertheless, an assessment of actual exchange-rate trends is not a criterion that the US Treasury applies in its currency manipulation assessment. We assume that in its report the US Treasury will exonerate China from the charge of manipulation for the country does not meet the criterion of “persistent intervention”. It is conceivable that the officials will announce that they will revise the list of criteria going forward in order to accommodate their President. For we are likewise almost as certain that the President will not be prepared to tolerate China escaping unpunished. Trump is unlikely to miss a single opportunity in the run-up to the midterm elections in November to publicly demonstrate his fierce struggle against the purportedly unfair treatment of the USA by China.

 

 

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