If you want a quick glimpse into the up-is-down, right-is-left world of the United States-China trade war, look no further than something Bloomberg’s Saleha Mohsin wrote Monday.
Referring to comments that Treasury Secretary Steve Mnuchin made in June, Mohsin wrote that the Trump administration believed “China was intervening in currency markets to prop up the yuan, and warned it could be designated a manipulator if it stopped.”
Read that again. China “could be designated a manipulator if it stopped” artificially propping up its currency.
Indeed, that’s exactly what happened on Monday. In response to a renewed threat from Trump to hit Chinese-made goods with tariffs, the Chinese government hit back in part by doing…nothing. China simply allowed the yuan to fall—as it would have, naturally, on the back of the news that the trade war between the U.S. and China was ramping up.
In return, Mnuchin issued a statement accusing China of having taken “concrete steps to devalue its currency”—even though the real culprit for the yuan’s slide is a lack of artificial support, not a deliberate devaluation—and the United States officially declared China to be a “currency manipulator.”
It’s not that the label isn’t accurate. China has been manipulating value of the yuan for years—decades, really—as a way to make exports from China more attractive to foreign buyers, and to avoid slipping into recession during economic downturns. Most of those interventions took place between 2003 and 2014, and China has largely stopped trying to influence the value of the yuan in recent years. Letting the yuan fall on Monday wasn’t an act of currency manipulation. It was the exact opposite, although China did take action on Tuesday to limit the yuan’s slide.*
“As global uncertainty stokes demand for dollars, the certainty of U.S. tariffs on Chinese-originating goods further reduces demand for Chinese yuan, exacerbating the downward pressure on the price of yuan in dollars,” explains Dan Ikenson, director of trade policy studies at the Cato Institute. “The People’s Bank of China observing the value of the yuan plummet as markets respond to Trump’s tariff frenzy is not currency manipulation.”
Writing at Forbes, Ikenson pointed out that the Chinese government has burned through more than $1 trillion trying to keep the yuan from falling as the trade war has taken its toll. Sooner or later, letting the currency fall was almost inevitable.
Source: Reason Magazine