US President Donald Trump’s administration on Monday formally labeled China a currency manipulator, further escalating its trade war with Beijing after the People’s Bank of China (PBOC) allowed the yuan to fall in retaliation for new US tariffs.
While the US Department of the Treasury’s determination is largely symbolic, as the potential punishments are a shadow of the steps Trump has already taken against China, it underscores the rapidly deteriorating relationship between the world’s two largest economies.
The US announcement followed a declaration by PBOC Governor Yi Gang (易綱) that China would not use the yuan as a tool to deal with trade disputes.
Photo: AFP
“I am fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties,” Yi said in a statement.
Under the designation, US Secretary of the Treasury Steven Mnuchin “will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions,” the department said in a statement.
Trump called the yuan’s plunge below the symbolically important level of 7 per US dollar “currency manipulation” in a tweet.
It is the first time that the US labeled a country a manipulator since the 1990s, when China was also the target.
The PBOC called the designation “wayward unilateralism and protectionist,” and said it “seriously undermined international rules.”
The yuan exchange rate “is driven and determined by market forces,” it said in a statement.
Both the onshore and offshore yuan breached the 7.0 level against the US dollar on Monday, which investors see as a key threshold in the Chinese currency’s value, but foreign exchange trading yesterday was calmer, with the onshore yuan weakening 0.08 percent to 7.0512, and the offshore currency strengthening 0.24 percent to 7.0802.
The PBOC yesterday weakened its central parity bank rate to the lowest level in more than 11 years, but by less than many analysts were expecting — suggesting the bank does not want to let the currency move too much.
“A more market-friendly China fix provided the first signal that the PBOC is having a second thought about weaponizing the yuan,” said Stephen Innes, managing partner at VM Markets Pte Ltd Singapore.
“However, the fix is ambiguous enough to keep two-sided interest alive while still conveying a message to US trade hawks that in no uncertain terms will China be a pushover,” he said.
The PBOC yesterday announced that it would sell 30 billion yuan (US$4.2 billion) of bills in Hong Kong on Wednesday next week. The move typically drains liquidity offshore, making it more costly to short the Chinese currency.
The move helped drive the yuan up 0.2 percent.
If there is no progress a year after the designation, China could face possible sanctions, including its firms being prohibited from competition for US government contracts and excluded from getting financing from a US government agency for development projects.
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