China says the decision to label it a currency manipulator will sow market chaos.
Hopes for resolution to trade war dashed
BEIJING/SHANGHAI: China’s central bank said yesterday that Washington’s decision to label Beijing as a currency manipulator would “severely damage international financial order and cause chaos in financial markets”.
Washington’s decision to ratchet up currency tensions on Monday would also “prevent a global economic and trade recovery,” the People’s Bank of China (PBoC) said in the country’s first official response to the latest US salvo in the two sides’ rapidly escalating trade war.
“China has not used and will not use the exchange rate as a tool to deal with trade disputes,” the bank said in a statement on its website.
The US accusation, which followed a sharp slide in the yuan on Monday, has driven an even bigger wedge between the world’s largest economies and crushed any lingering hopes for a quick resolution to their year-long trade war.
The dispute has already spread beyond tariffs to other areas such as technology, and analysts caution titfor-tat measures could widen in scope and severity, weighing further on business confidence and global economic growth.
The US Treasury Department said on Monday that it had determined for the first time since 1994 that China was manipulating its currency, taking their trade dispute beyond tariffs.
The department referred to a PBoC statement on Monday as an open acknowledgement that it “has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis.”
The US decision was driven purely by political motive to “vent its anger”, said Global Times, an influential Chinese tabloid published by the ruling Communist Party’s People’s Daily.
“China no longer expects goodwill from the United States,” Hu Xijin, the newspaper’s editor-in-chief, tweeted.
The US decision to label China a manipulator came less than three weeks after the International Monetary Fund (IMF) said the yuan’s value was in line with China’s economic fundamentals, while the US dollar was overvalued by 6% to 12%.
The US law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant trade surplus with the United States, and persistent one-way intervention in foreign exchange markets.
The PBoC said it did not fit the criteria for the label.
Zhang Anyuan, chief economist of stock brokerage China Securities Co Ltd, said it “is baseless for the US side to determine that there was exchange rate manipulation based on the change in the exchange rate of the RMB (yuan) on a single day.”
“After the labelling, it’s possible Washington will introduce punishing measures that go beyond existing understanding of the situation,” he said.
Chinese state media had warned that Beijing could use its dominant position as a rare earths exporter to the United States as leverage in the trade dispute. The materials are used in everything from military equipment to high-tech consumer electronics.
Shares in some of China’s rare earthrelated firms surged on Tuesday amid speculation the sector could be the next front in the trade war.
Beijing could also step up pressure on US companies operating in China, analysts say.
In a further sign of deteriorating ties, China’s Commerce Ministry announced overnight that its companies had stopped buying US agricultural products in retaliation against Washington’s latest tariff threat.
“In the end, the United States will eat the fruit of its own labour,” the PBoC said.
Chinese monetary authorities let the yuan fall past the closely watched 7 level on Monday so that markets could finally factor in concerns around the trade war and weakening economic growth, three people with knowledge of the discussions told Reuters on Monday.
The PBoC has insisted the value of its yuan is determined by the market, though it has maintained a firm grip on the currency and supported it when it neared sensitive levels over the past year.
US Treasury Secretary Steven Mnuchin said the US government would engage with the IMF to eliminate unfair competition from Beijing.
After determining a country is a manipulator, the Treasury is required to demand special talks aimed at correcting an undervalued currency, with penalties such as exclusion from US government procurement contracts.
“Naming China a currency manipulator could open the door for US tariffs to eventually increase to more than 25% on Chinese goods,” according to a note from DBS Group Research.