Row over renminbi highlights growing US-China schism
The Trump administration’s formal designation of China as a currency “manipulator” on Monday night was dramatic, coming just hours after Beijing finally allowed the renminbi to slip through seven to the dollar — a level it had flirted with repeatedly since 2016 but never breached.
It was also largely symbolic. For now US President Donald Trump’s Treasury Department will seek consultations with the IMF over possible remedies to what it believes is a rigged system.
The designation did, however, highlight one of the central conflicts bedevilling Chinese and US trade negotiators, who are as far as they have ever been from a final settlement after almost 18 months of fruitless talks. In area after area, the US is demanding structural reforms that the Chinese Communist party believes would undermine the stability of the world’s second-largest economy.
The Chinese currency’s “managed float” is one of the best examples of this divide.
At the start of each trading day, China’s central bank sets a “reference rate” against which the renminbi is allowed to rise or fall no more than two per cent in onshore trading. While there are no such constraints in the renminbi’s main offshore market in Hong Kong, trading there is dominated by large state-owned financial institutions that do Beijing’s bidding when needed.
For US officials this allows Beijing to move the currency as it sees fit by, for example, directing it downwards against the dollar to offset the impact of the punitive tariffs Mr Trump has slapped on about half of all Chinese exports to the US.
Chinese officials and analysts counter that the renminbi is effectively market-driven but with sensible controls designed to avoid wild fluctuations, such as last year’s sell-off of the Turkish lira.
“The renminbi’s depreciation through seven to the dollar was a market move, not a government target,” says Guan Tao, a former official at the country’s foreign exchange regulator now teaching at Wuhan University in central China. “It is a result of what the US government has done [during the trade war] not what the Chinese government has done.”
If anything, Mr Guan and other Chinese officials argue, the Chinese government has worked to prevent what would have been an even more rapid devaluation as Mr Trump repeatedly escalated the trade war, putting further pressure on China’s already slowing economy.
“The renminbi is depreciating mainly because of market pressures related to the trade war, disappointing second-quarter economic data and the [Chinese] government’s crackdown on domestic financial risks,” says Zhang Ming at the Chinese Academy of Social Sciences in Beijing.
Many international observers agree with this view and the Trump administration is unlikely to get a sympathetic hearing when it brings its complaints to the IMF. In its last annual review of the Chinese economy, released in July 2018, IMF staff argued that “the renminbi remains broadly in line with fundamentals” and also “welcomed the increase in the flexibility of China’s exchange rate, which should continue”.
In a statement issued on Monday night, Chinese central bank governor Yi Gang said that the move through seven to the dollar would not affect the PBoC’s commitment to “fundamental stability” for the renminbi. On Tuesday morning, the central bank set the renminbi’s daily reference rate at 6.97 to the dollar, although it then quickly fell to 7.06 to the dollar.
“The [renminbi] could come back below seven before breaching it again,” Wang Tao, Chief China economist at UBS, said in a research note. “We expect the PBoC to tightly manage exchange rate expectations and prevent [the renminbi] from depreciating signicantly.”
Ms Wang added that even if Mr Trump does impose 25 per cent tariffs on all Chinese exports to the US over coming months, the renminbi will not move significantly below 7.2 to the dollar this year.
Four years ago, former PBoC governor Zhou Xiaochuan introduced reforms that gave the central bank less flexibility to set the renminbi’s daily reference rate, tying it more closely to the previous day’s close and overnight dollar movements in Europe in the US.
But the initiative was poorly communicated and sparked a prolonged bout of market turmoil that spooked President Xi Jinping’s administration. In response, Mr Zhou watered down his reforms and implemented tough new capital controls.
“Our controls on capital outflows are already strict,” says Mr Zhang at CASS. “The possibility of a vicious cycle where depreciation of the renminbi leads to capital flight, and capital flight leads to more depreciation, is very low.”
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