In what can be termed as an unexpected turn of events, the United States Treasury has designated China as a Currency Manipulator. The announcement has been done via the Treasury Department’s official Twitter handle on 5th August, followed by a press release.
U.S. Treasury Designates China as a Currency Manipulator: https://t.co/Ndu7vtF3wO
— Treasury Department (@USTreasury) August 5, 2019
The move has been taken by Secretary Mnuchin, under the US President Donald Trump’s auspices. The decision comes after a notable decline in the value of China’s yuan against the United States Dollars. Hong Kong witnessed a significant drop of 1.9 percent in yuan, recording a fall of 7.1087 against the USD, as per the data by Refinitiv. It was the largest loss noted for a single day of the local currency against the USD since August of 2015 when a sudden downturn had been allowed by Beijing.
The depreciation of yuan was labeled as a deliberate action by the Chinese central bank to probably gain an unfair competitive edge in the space of international trade.
As the repercussion of the move, the Secretary will be engaging with the IMF (International Monetary Fund) to abolish the unjust competitive benefit created by the latest actions of China.
However, it’s not just the currency decision. The government of China had announced suspension on the US agricultural product purchases completely which might also have contributed to the move. The governor of China’s central bank, Yi Gang, maintains that the decline in the currency value was because of the market forces and the nation will not engage in the activity of competitive devaluation.
President Donald Trump, however, thinks otherwise. He perceived the devaluation as an intended move against the US.
China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!
— Donald J. Trump (@realDonaldTrump) August 5, 2019
In one of his series of tweets, Trump says that China has utilized currency manipulation to steal their factories and businesses, hurt their jobs, harm their farmer’s prices, and depress their workers’ wages; but not anymore.
The most current FX report has also noted China’s concrete steps for currency devaluation. The report has highlighted that China did maintain considerable foreign exchange reserves in spite of using such tools actively back in the day. The context of such actions as well as the debatable market stability reasoning of the nation does confirm their purpose behind this devaluation is to attain an unjust competitive benefit in global trade.
It’s worth considering that labeling China as a currency manipulator is the first decision since 1994. There are 3 criteria used by the Treasury for applying the designation: active intervention in their currency markets, having big overall current-account surpluses and having big trade surpluses with the US.
The press release further considers these actions of China as an infringement of their G20 commitments of refraining from the competitive devaluation. Moreover, the Treasury urges China to boost transparency of its exchange rate as well as reserve management operations and aims.
On the other hand, global stock markets have already started experiencing the after-effects of the move with Dow and S&P witnessing a drop.