U.S. Designates China as Currency Manipulator
Date: Tuesday, August 6, 2019
Source: The Wall Street Journal
Stocks tumble as the two nations swap blows over trade
WASHINGTON—The U.S. Treasury labeled China a currency manipulator after the Chinese central bank let the yuan depreciate, capping a day of trade-war escalations that sparked a global fall in financial markets and fears the clash could stall the U.S.’s economic expansion.
The uncertainty could pressure the Federal Reserve to consider more interest-rate cuts, following its decision last week to lower rates for the first time in more than a decade.
China’s yuan fell as much as 1.9% to a record offshore low of 7.1087 to the dollar in Hong Kong, according to data from Refinitiv, putting the currency on course for its biggest single-day loss against the dollar since August 2015, when Beijing allowed a sudden depreciation.
In mainland China, the yuan also weakened beyond the 7 yuan to the dollar level—which policy makers in recent years have defended—for the first time since 2008.
In addition to the currency move, Beijing said that Chinese companies had suspended purchases of U.S. agricultural products, and that the government has not ruled out putting tariffs on U.S. farm goods purchased after Aug. 3.
China’s central bank said Monday’s depreciation was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.” People’s Bank of China Governor Yi Gang said that China won’t engage in competitive devaluation and that the decline was due to market forces.
President Trump, who as a candidate repeatedly threatened to designate China a currency manipulator, took the devaluation as a deliberate shot at the U.S. “China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices,” Mr. Trump wrote in a tweet on Monday. “Not anymore!”
The decision to label China as a currency manipulator for the first time since 1994 comes just four months after the U.S. Treasury passed on an opportunity to make such a formal designation as part of its semiannual currency report.
The Treasury uses three criteria to apply the designation: actively intervening in their currency markets, having large trade surpluses with the U.S., and having large overall current-account surpluses.
Monday’s action by the Treasury is mostly symbolic, requiring the U.S. administration to consult with the International Monetary Fund to try to eliminate the unfair advantage the currency measures have given a country.
“The announcements from Beijing represent a direct shot at the White House and seem designed for maximum political impact,” said Chris Krueger, strategist at Cowen Washington Research Group. “We expect a quick—and possibly intemperate—response from the White House, and consequently expect a more rapid escalation of trade tensions.”
The back-and-forth between the world’s two largest economies sent global financial markets reeling, with the Dow Jones Industrial Average falling 767 points, or 2.9%, to 25,717.74 and the S&P 500 index falling 3% to 2,844.74.
U.S. officials had been expecting retaliation from Beijing after Mr. Trump said last week he would impose 10% tariffs starting Sept. 1 on about $300 billion in Chinese goods that aren’t now subject to levies.
The president followed that up by saying he could ratchet tariffs even higher—even above 25%—as he complained that China hasn’t followed through on expectations it would buy more U.S. farm products.
The White House had no comment on next steps in the trade conflict Monday.
The Trump administration began imposing rounds of tariffs last year in an effort to get China to make structural changes to its economic system to benefit U.S. companies and to purchase more U.S. products to narrow the trade deficit. Some observers expect the U.S. to pause before taking any countermeasures.
“This is not a surprise,” said Derek Scissors, a senior trade expert at the American Enterprise Institute think tank who occasionally consults with the administration. “There’s nobody with an agenda that wants to respond to this, with the possible exception of the boss.”
Mr. Trump has long complained that China keeps the yuan’s value artificially low to make its goods cheaper on global markets. Traders contend that the Chinese government is merely allowing the currency to respond to market conditions as the trade war fuels concern about the global economy.
“Other emerging markets are also tanking,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “If China is going to allow market forces to determine the exchange rate, this is what will happen with the yuan.”
At the same time, Chinese authorities will likely be wary of letting the yuan depreciate too far. Continued sharp declines in the currency could stoke capital outflows and make it difficult for local companies to service their dollar-denominated debt.
Mr. Trump repeated on Monday his frequent accusation that China manipulates the yuan.
“China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the U.S. with unfair trade practices and currency manipulation,” he wrote in a series of tweets. “Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
Fed officials said the U.S. central bank doesn’t seek to influence the dollar’s value, though lower interest rates do tend to cause the greenback to weaken against other currencies. The Treasury Department is the lead actor on currency policy within the U.S. government, Fed officials have noted.
If it wants to intervene in currency markets, Mr. Krueger said, the administration could tap a vehicle known as the Exchange Stabilization Fund.
But the fallout from Mr. Trump’s latest tariff threat has already added pressure on the Fed to continue lowering interest rates. Futures markets are currently pricing in a 100% chance of at least one rate cut at its next policy meeting, on Sept. 17-18, according to CME Group .That’s up from 51% last Wednesday, when the Fed reduced its benchmark federal-funds rate to a range between 2% and 2.25%.
“We’re committed to sustaining the expansion, and I’m certainly monitoring developments for their implication for the outlook, and I’ll continue to be very attentive to them,” Fed governor Lael Brainard said at an event Monday in Kansas City, Mo.
Of paramount importance to the Fed is ensuring that a global growth slump, no matter the cause, doesn’t derail the U.S. economic expansion.
Fed officials have recently cited evidence that uncertainty stemming from the trade war has weighed on business investment and contributed to a slowdown in manufacturing—major factors in their decision to lower interest rates last week.
Another risk from the trade war is the potential for market turmoil that crimps consumer and business confidence, causing spending to retreat.
Fed Chairman Jerome Powell said last week that trade uncertainty was harder for the Fed to forecast than other potential policy shocks, both because there is less recent experience of tariff escalation between major trading partners and because of the unpredictable nature of the administration’s negotiations.
“Markets move quickly. It takes some time to see how that evolves, and so the best you can do right now is just to monitor and see how that unfolds,” said Kansas City Fed President Esther George.
The central bank’s next policy decision is scheduled for Sept. 18.
Mr. Powell “will ultimately have to eat his words” that last week’s rate cut was a “midterm correction in rates,” said Scott Anderson, chief economist at Bank of the West. “The July rate cut is, in fact, only the first in a series of cuts that will be needed to forestall an outright economic recession in the United States.”