Falsely Trumpeting Chinese currency manipulation

It is highly unlikely that President Elect Trump will officially deem China a currency manipulator when he takes office in 2017. China is a currency manipulator, but not in the way that Donald Trump thinks. The more than 6% decline in foreign exchange reserves in 2016 highlights that the Peoples Bank of China is supporting the currency rather than exacerbating its weakness to the detriment of American businesses, as Trump asserts. Falsely Trumpeting Chinese currency manipulation.

Chinese policymakers set a target rate for the Chinese Renminbi (CNY) each day, based on the prior day’s closing price, referencing a basket of currencies[1]. The currency is then able to trade within a +/-2% band on that day. China does intervene to manage the currency’s movements in order to ‘better maintain the overall stability of the RMB exchange rate’. Although the CNY has dropped nearly 3.4% against the US Dollar since end-Q2 2016, against its reference basket of currencies, it has fallen just 0.8%, broadly range-trading over the period.

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We expect that Trump will moderate the language he has used toward China and don’t expect him to label China a currency manipulator. The US Treasury have three criteria to determine whether a country is a manipulator. To be deemed a currency manipulator, a country must:

• have a trade surplus of greater than US$20bn with the US (currently US$349bn[2]); and
• have a current account surplus of greater than 3% of GDP (currently 2.4%[3]); and
• be engaged in persistent one-sided intervention in the foreign exchange market by repeated net purchases of greater than 2% of GDP (China has net sales of 5% over past year[4]).

China currently only satisfies one of those criteria – that it has a trade surplus of over US$20bn with the US. President Elect Trump will have significant problems in changing the criteria or by naming China a manipulator if they do not satisfy all three.

We expect the move toward greater currency liberalisation to continue as there is an onus on China (with the CNY a part of the IMF SDR valuation basket) to increasingly have its currency determined by market forces to spur trade and investment activities. Labelling China a currency manipulator and instigating proceedings to punish its largest trading partner, would seem to be counter to Trump’s objective to generate greater business activity for US companies. If China continues, as we expect, to progress with further financial market reforms, it would make sense for the US to enhance ties with China to achieve greater access to Chinese markets for US companies.

[1] The CFETS RMB Index measures CNY against a basket of 13 currencies, based mainly on international trade. The largest weightings: USD 26.4%, EUR 21.4%, JPY 14.7%.
[2] Source: US Census Bureau
[3] Source: Bloomberg
[4] Source: Bloomberg

Martin Arnold, Global FX & Commodity Strategist at ETF Securities

Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.