You may recall that Chinese currency manipulation was a significant issue in the 2012 presidential campaign. Mitt Romney’s plan to get tough on China included a pledge to officially declare the country a currency manipulator on Day One of his presidency.
In 2012, China really did have a long-standing practice of intervening in the markets to suppress the value of the yuan. The Chinese central bank routinely bought dollars and sold yuan, causing the yuan to be worth less than it otherwise would be. This had the effect of reducing the cost of Chinese exports, boosting China’s manufacturing industries, and making it harder for American firms to compete.
Times have changed, but the American political rhetoric hasn’t. And so when President Trump acted to designate China as a currency manipulator yesterday, seven years after candidate Romney promised to do so, he was too late. China no longer does what it was doing in 2012. In fact, since about 2014, when China conducts market activities to manage the value of the yuan, it generally acts to push the price up, not down. That is, China doesn’t buy dollars anymore, it sells them. (Or, as the economist Brad Setser describes, it makes credible commitments to sell dollars if necessary, and those commitments serve to guide the price of the yuan and often make the actual transactions unnecessary.)
China has shifted its currency strategy because it has been trying to shift its economic strategy. In the last few years, China has (not with great success) been trying to move away from an export-based economic model toward one where the economy is driven by domestic consumer demand. A stronger yuan increases Chinese consumers’ purchasing power and therefore should increase domestic demand, which is why China has been acting over the last few years to strengthen the yuan.
Of course, you could say pushing the price of the yuan up is manipulation, just as much as pushing it down would be. But the direction matters, because currency values are one of the few policy areas where China and the U.S. are in alignment, even if we don’t admit it. We want a strong yuan because it tends to reduce the trade deficit and make American exporters more competitive. Why would we punish China for manipulating its currency in the direction we wanted it to go?
We wouldn’t, and Trump didn’t. Hilariously, the “currency manipulator” designation is aimed at China’s failure to manipulate its currency as we wanted. The yuan didn’t fall on Monday because China pushed it down; it fell because China failed to keep pushing it up. That action — allowing the currency to float away from where we liked it — may have been contrary to U.S. interests, but it’s the opposite of currency manipulation.
A major reason global financial markets have stabilized today, after yesterday’s tumble, is that the yuan stabilized. After allowing the drop below seven per dollar, China’s central bank set the “fixing” for the yuan (the target for how much it should be worth, compared to dollars) at a level indicating that they weren’t going to allow much more of a fall. As of this writing, it is 7.03 yuan to the dollar — not exactly a nosedive — and because of this, worries have eased for now about a radical shift in currency values that could upend global trade flows.
It makes sense that China would hesitate, because while letting the yuan weaken is a way to cause the Dow to fall and show Trump that China can hit back where it hurts, a weaker yuan undermines China’s domestic economic goals. It’s a mirror image of the problem with Trump’s own trade war strategy — China’s actions that cause economic pain here cause pain over there, too.
“It’s like giving a hemophiliac blood thinners — you just killed the patient because you gave them the opposite of what they need,” says Patrick Chovanec, a China expert at Silvercrest Asset Management and former professor at Tsinghua University in Beijing. He notes China has the opposite problems from what you would expect in the stereotypical economically troubled country — too much saving, too many exports, not enough consumer spending — and so the sort of devaluation that might have helped, say, Greece in 2009 would only make China’s current situation worse.
This is a tragic aspect of the economic dispute between the U.S. and China. There are several areas where we have genuinely misaligned interests, such as the handling of American intellectual property, Chinese market access for U.S. firms, and national security concerns. Trade and currency balances are one area where we should be able to see eye to eye: We want China to rebalance away from exports; so, at least in theory, does China. Conceivably, we could find common ground in this area that would help smooth over other disputes. Instead, China has failed to engineer the rebalancing it wants, and we have backed them into a corner where they may feel compelled to hit us with a tool that will only make that rebalancing harder.