InvestorQ : I had recently read that the US has withdrawn the Currency Manipulator tag from China. What are the implications of this move for China?
Chandralekha Desai made post

I had recently read that the US has withdrawn the Currency Manipulator tag from China. What are the implications of this move for China?

Mitali Bhutta answered.
1 year ago

This is part of the Phase 1 deal between the US and China. The US Treasury department dropped the designation of China as a currency manipulator in a gesture that aims to ease tensions with Beijing. Both China and the US have been trying to put an end to the prolonged trade war that has hit both the countries quite hard. The broad implications of this announcement can be summarized as under.

· The US trade negotiators have emphasized that China has made enforceable commitments to refrain from competitive devaluation and at the same time promoting transparency and accountability. This was confirmed by the US Treasury Secretary. This was an essential part of the broader agreement the administration secured with China on trade.

· This move by the US government virtually reverses last summer’s controversial decision to tag China with the label of currency manipulator. At that point of time, relations between Washington and Beijing had really deteriorated sharply.

· This move led to the Chinese RenMinBi strengthening to a five-month high against the dollar in Asian trade in response to a move that was most likely to strengthen the Chinese currency.

· The onshore RMB, which trades 2% range either side of a daily midpoint set by the People’s Bank of China (PBOC), was quoting 0.2% stronger at Rmb6.8809/$. This figure had gone as high as 7.20/$ last year.

· As a move towards the greater degree of transparency shown by global hard currencies, China has accepted and assured that the exchange rate policies of China will not be to the detriment of its trading partners. China also affirmed to publish relevant information related to exchange rates and external balances.

· As a follow up to this move, the Chinese vice-premier is expected to visit Washington this week to participate in a ceremony to sign the trade deal at the White House. This event is also expected to feature an appearance by Donald Trump. The deal is all set to include a currency chapter that commits Beijing not to engage in competitive devaluation of currencies.

· It could point to a more lasting truce between the world’s two largest economies, since it settles one of China’s biggest sources of irritation with Washington. Of course, other IPR issues remain but none is as serious and immediate in its impact as the manipulation of the currency.

· Experts contend that Chinese currency games cause real damage to the US economy. For example, Chinese currency manipulation takes the form of lost jobs, closed factories, and stagnant wages in the United States. The problem has been acute because the Chinese RMB had been steadily depreciating against the dollar over the course of the trade war, offsetting the impact of US tariffs.

· The US Treasury had come under heavy criticism for labelling China a currency manipulator in the first place. Most US officials admit that it was a political move to punish Beijing and put pressure on its trade negotiators. The label does not carry any specific consequences such as sanctions or tariffs but is an overhang on the currency.