Formally designating China as a “currency manipulator" may scratch an old itch for US President Donald Trump, but is unlikely to achieve anything for America. In the latest instance, Washington acted in response to China’s central bank letting the yuan slip below the psychological barrier of seven yuan to the dollar. The last time the US declared China an unfair fiddler of its currency was back in 1994, when Bill Clinton was in the White House.
In America’s assessment, China has failed on three parameters: it runs a current account surplus, has a trade surplus with the US, and has shown persistent one-sided intervention in its currency market. The basic allegation is that the People’s Bank of China has depressed the yuan below its natural level to give Chinese exporters an unfair advantage in global trade. Whether this is true is open to dispute. While China’s central bank has often intervened by buying dollars with yuan (as in the early 2000s), this has not been its consistent practice. Since late 2016, for example, it has done quite the reverse. As for the exchange rate shifts that triggered the latest US response, all that China appears to have done is stop supporting the yuan, which was slipping on weakening exports—amounting to a fall in demand for the yuan—as a result of trade tensions set off by the US in the first place.
In other words, the US call is a reflection of the current state of geopolitics rather than economics. Should Beijing be worried about punitive measures? The US may impose penalties by barring Chinese firms from US government procurement contracts, for example. But then again, China is not a major recipient of these contracts anyway. Other strictures are not likely to bother Beijing either. In sum, the accusation has only driven an even bigger wedge between the world’s two largest economies.