US draw­ing China forex into trade row

Gulf Times Business - - FRONT PAGE -

The United States sought to make cur­rency a cen­tral part of any so­lu­tion to a bruis­ing trade fight with China, keep­ing the pres­sure on Bei­jing to speed up eco­nomic re­forms at a gath­er­ing of world pol­i­cy­mak­ers who pledged to do more to safe­guard global growth.

China’s cen­tral bank gov­er­nor Yi Gang yes­ter­day promised to keep the yuan cur­rency’s value “broadly sta­ble” at In­ter­na­tional Mone­tary Fund and World Bank an­nual meet­ings in Bali where the IMF at­tempted to prod the world’s two largest economies to re­solve their dis­putes.

The Peo­ple’s Bank of China gov­er­nor’s state­ment to the IMF steer­ing com­mit­tee echoed Fund mem­bers’ to avoid com­pet­i­tive cur­rency de­val­u­a­tions.

“China will con­tinue to let the mar­ket play a de­ci­sive role in the for­ma­tion of the RMB ex­change rate,” Yi said in the state­ment “We will not en­gage in com­pet­i­tive de­val­u­a­tion, and will not use the ex­change rate as a tool to deal with trade fric­tions.”

A com­mu­nique is­sued by the IMF’s mem­ber coun­tries yes­ter­day – which fol­lowed fresh tu­mult in fi­nan­cial mar­kets – also sought to soothe ner­vous in­vestors with a pledge to step up their di­a­logue on trade is­sues.

US Trea­sury Sec­re­tary Steven Mnuchin said yes­ter­day that Chi­nese of­fi­cials told him that fur­ther yuan de­pre­ci­a­tion was not in China’s in­ter­ests.

He told Reuters in an in­ter­view on Fri­day that cur­rency is­sues needed to be part of US-China trade talks.

“We want to make sure that (yuan) de­pre­ci­a­tion is not be­ing used for com­pet­i­tive pur­poses in trade,” Mnuchin told re­porters yes­ter­day.

The yuan has fallen more than 8% against the dol­lar since the end of April to about 6.91 on Fri­day, close to the psy­cho­log­i­cally im­por­tant 7.0 level not seen in a decade.

In the com­mu­nique from the In­ter­na­tional Mone­tary and Fi­nan­cial Com­mit­tee, the Fund’s mem­ber coun­tries also agreed to de­bate ways to im­prove the World Trade Or­gan­i­sa­tion so it can bet­ter ad­dress trade dis­putes.

“We ac­knowl­edge that free, fair, and mu­tu­ally ben­e­fi­cial goods and ser­vices trade and in­vest­ment are key en­gines for growth and job cre­ation,” the IMFC said in the state­ment.

“We will re­frain from com­pet­i­tive de­val­u­a­tions and will not tar­get our ex­change rates for com­pet­i­tive pur­poses,” it added.

On Thurs­day, IMF man­ag­ing di­rec­tor Chris­tine La­garde urged mem­bers to “de-es­ca­late” trade ten­sions and work on fix­ing global trade rules.

She also warned against adding cur­rency to the trade con­flict, say­ing this would hurt global growth as well as “in­no­cent by­stander” na­tions, in­clud­ing emerg­ing mar­kets that sup­ply com­modi­ties to China. She urged.

Some of these coun­tries, in­clud­ing In­done­sia, the host of the IMF and World Bank meet­ings, are al­ready strug­gling to con­tain cap­i­tal out­flows prompted by higher US in­ter­ests rates.

Fears that rates could spike sharply higher – and the in­ter­na­tional trade ten­sions – touched off a sear­ing sell­off in global stock mar­kets over the past week.

Eu­ro­pean Cen­tral Bank gov­er­nor Mario Draghi warned yes­ter­day that a “snap back” in rates and a sharp repric­ing of as­set prices were the big­gest risks to the eco­nomic out­look.

Fed­eral Re­serve Vice Chair Ran­dal Quar­les said the US cen­tral bank con­sid­ers the ef­fect of its ac­tions on emerg­ing mar­kets, but get­ting do­mes­tic mone­tary pol­icy right was the Fed’s pri­or­ity.

“It’s not go­ing to be in the in­ter­est of any­one in the world... for us to get be­hind the curve in the US by mod­er­at­ing what we think is the right course of do­mes­tic pol­icy,” Quar­les told a fi­nance con­fer­ence in Bali.

Blam­ing the Sino-US trade dis­pute and tighter fi­nan­cial con­di­tions in emerg­ing mar­kets, the IMF this week cut global growth fore­casts for 2018 and 2019.

“The re­cov­ery is in­creas­ingly un­even, and some pre­vi­ously iden­ti­fied risks have par­tially ma­te­ri­alised,” the IMFC com­mu­nique said, re­fer­ring to threat­ened tar­iffs and out­flow pres­sures.

The United States and China have slapped tit-for-tat tar­iffs on hun­dreds of bil­lions of dol­lars of each other’s goods over the past few months, sparked by US Pres­i­dent Don­ald Trump’s de­mands for sweep­ing changes to China’s in­tel­lec­tual prop­erty, in­dus­trial sub­sidy and trade poli­cies.

Trump has fre­quently ac­cused China of cheap­en­ing its cur­rency to gain a trade ad­van­tage, claims Bei­jing has con­sis­tently re­jected.

The US Trea­sury is due to re­lease a key re­port on cur­rency ma­nip­u­la­tion next week.

De­spite re­as­sur­ances from China’s cen­tral bank on cur­rency pol­icy, some an­a­lysts say yuan weak­ness will per­sist, as there is no clear path to­wards re­solv­ing the US-China trade dis­pute and higher tar­iff rates loom in Jan­uary.

“Clients in China re­main un­will­ing to call a bot­tom in the yuan,” NatWest Mar­kets head of for­eign ex­change strat­egy Man­soor Mohi-ud­din said in a re­search note. “This in turn makes us cau­tious about call­ing for a peak in the dol­lar glob­ally.”

Fur­ther Fed­eral Re­serve rate hikes are ex­pected to un­der­pin the dol­lar’s strength and in­crease cap­i­tal out­flow pres­sures on emerg­ing mar­ket economies.

But Bank of Ja­pan gov­er­nor Haruhiko Kuroda said the Fed’s rate hikes were “ba­si­cally good” for the world econ­omy, though he was more cau­tious about es­ca­lat­ing trade ten­sions due to their “rather un­usual” scale.

From left: World Bank vice pres­i­dent and cor­po­rate sec­re­tary Yvonne Tsikata, In­done­sia’s fi­nance min­is­ter Sri Mulyani In­drawati, World Bank pres­i­dent Jim Yong Kim, In­ter­na­tional Mone­tary Fund man­ag­ing di­rec­tor Chris­tine La­garde, South African Re­serve Bank deputy gov­er­nor Daniel Mminele, and United Na­tions sec­re­tary gen­eral An­to­nio Guter­res pose be­fore a meet­ing at the IMF and World Bank an­nual meet­ings in Nusa Dua on In­done­sia’s re­sort is­land of Bali yes­ter­day. La­garde warned against adding cur­rency to the trade con­flict, say­ing this would hurt global growth as well as “in­no­cent by­stander” na­tions, in­clud­ing emerg­ing mar­kets that sup­ply com­modi­ties to China.

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