Source: East Asia Forum
Author: Editorial Board, ANU
Tensions between the United States and China entered a dangerous new phase this week. For the first time in 25 years, US authorities labelled China a currency manipulator after the RMB fell below the 7 yuan-per-dollar level. This opens the door to the United States’ levelling sanctions against China as well even more extreme trade restrictions, as the global trade and technology war morphs into a currency war.
The actions of the United States were arbitrary, to say the least, and have rocked global financial markets. The recent ‘ASEAN Outlook on the Indo-Pacific’ shows that ASEAN countries are more and more wary of the approach being taken by the United States in the region. They are right to be worried.
Labelling China a currency manipulator made little sense, both economically and institutionally.
Economically, a weakening RMB is to be expected in the current economic circumstances. The Chinese economy has been slowing while the United States continues its longest economic boom in history. Chinese exports to the United States have been under increasing strain while escalating global risks have seen increased demand for safe haven US financial assets. All of these variables point to a weakening RMB against the US dollar. ‘They are not driving the currency down’ notes Marc Chandler, Chief market strategist at Bannockburn Global Forex, ‘but just accepting market forces’. Within a narrow band the Chinese monetary authorities let the currency settle where the market took it.
Institutionally, China’s actions fail to satisfy the US Treasury’s own definition of a currency manipulator. ‘China has not been intervening’ says Mark Sobel, a 40-year US Treasury veteran. ‘By Treasury’s own foreign exchange report criteria, China doesn’t even come close to meeting the terms for manipulation’. The IMF has similarly judged that China’s exchange rate in …continue reading