China no longer a manipulator of its currency

Here is a very good explanation from the FT on China’s exchange rate and the fact that the US no longer sees China as a manipulator of its currency – the Renminbi.

  • In May 2019 with the threat of US tariffs on Chinese goods the Renminbi depreciated in value – notice the chart is inverted which means that 1 US$ buys more Renminbi and the value of the currency falls. To look at it another way it takes more Renminbi to buy 1US$. This makes Chinese exports cheaper in the US.
  • In August 2019 when the US came good on their threat to impose tariffs the Renminbi fell below 7 Renminbi / US$ in order to protect its exports to the US. Below 7 Renminbi / US$ is seen as a major threshold – the last time this happened was after the GFC.

How do China authorities intervene to manipulate the Renminbi?

The Renminbi is not a floating exchange rate which it is not determined by supply and demand. The government manages its exchange rate in two ways:

  • Peoples Bank of China (Central Bank) can or sell US$ on the foreign exchange market – this depends on what they wish for the value of the Renminbi against the US dollar
  • People’s Bank of China permits the Renminbi to trade 2 per cent on either side of a daily midpoint set by the. Basically at 9.15am the Peoples Bank of China and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate.

But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things:

  • A significant bilateral trade surplus with the US.
  • A material current account surplus of more than 3% of GDP.
  • Persistent one-sided intervention in its currency market.

But in August the Chinese economy was slowing down and the Peoples Bank of China (Central Bank) provided stimulus to the economy which would depreciate the currency anyway. However with more trade talks between the US and China and both agreeing to no more tariffs and phase one of a trade deal, the value of the Renminbi against the dollar starts to appreciate. Although the US has no longer called China a currency manipulator it seems that it didn’t have the grounds to do so. This must be a concern for other trading partners with the US.

Leave a Reply

Your email address will not be published. Required fields are marked *