Huang Yiping: China Is No Currency Manipulator
China is a currency manipulator? I don’t think it makes much sense to say that.
Generally speaking, the U.S. Department of the Treasury determines whether a country is a currency manipulator based on three key criteria. The first is a significant bilateral trade surplus with the United States of at least $20 billion. The second is a material current account surplus that is at least 2% of GDP. The third is persistent, one-sided intervention during which net purchases of foreign currency are conducted repeatedly, in at least six months of a 12-month period — with these net purchases totaling at least 2% of an economy’s GDP over a 12-month period.
China has more or less met the first criteria over the years, which is why China has been put on Treasury’s monitoring list, but the department has not been able to back up its claim that China is a currency manipulator.
I want to point out that the U.S. trade deficit to China is, to a large extent, a result of the division of labor in the global supply chain. If we measure China’s trade with trade partners in the world as a whole, we see that it is quite balanced.
Let’s briefly review China’s exchange rate policies since the beginning of China’s reform era. From 1978 to 1993, China used a dual exchange rate system, during which the currency continued to depreciate. From 1994 to 1997, the government merged the two tracks and adopted a managed floating exchange rate with reference to the U.S. dollar. During that period, the currency slowly appreciated. From 1997 to 2005, a fixed exchange rate was used and pegged to the U.S. dollar. Since 2005, a managed floating exchange rate with reference to a basket of currencies has been in place.
Although there have been changes, China’s exchange rate regime has more or less followed a managed floating exchange rate system.
But the central bank has altered how it manages the country’s foreign exchange in recent years. If we take a look at what has been going on since 2017, we can see that the central bank has rarely bought and sold foreign exchange on the market — that is to say, there has been less direct intervention.
The management now is mainly conducted through the “counter-cycle factor,” the goal of which is to counter sharp short-term fluctuations.
Not long ago, a U.S. official said at the G-20 Summit that “if the Chinese government does not intervene to support the yuan exchange rate, we may have to name China as a currency manipulator.” The logic of this rhetoric seems to be: If you do not manipulate your currency, we will label you a manipulator.
More importantly, we must understand that the idea — which I think is something that (U.S. President Donald) Trump believes — that devaluation is good for a country’s economic growth is in fact outdated.
When we talk about yuan devaluation being good for economic growth, we are only taking trade into account, as weaker currencies will make exports more competitive. But in fact, as the capital accounts of many countries are becoming more open, we have to take finance into consideration as a currency flow channel. And the mechanism of finance is just the opposite of that of trade — devaluation will lead to stronger expectations of devaluation, therefore driving more capital out of a country, which is not conducive to economic growth.
We have found that in today’s China, finance is far more important than trade in terms of currency flows. I think this principle is probably right not only for China but also for the United States. So I’m not optimistic about Trump’s weak dollar policy, because the U.S. dollar is far more dependent on capital markets and the services sector than China.
So, what China should do?
First, prepare for the worst. We must make preparations for what Trump might do next and try to avoid waging a comprehensive war in the financial sector. Some experts have suggested that we should devalue the yuan substantially or sell the U.S. dollar bonds we hold. In my opinion, that’s a lose-lose strategy that we should not follow.
Second, we should move more quickly to build a managed free-floating exchange rate, which has the benefits of increasing policy transparency and reducing misunderstandings. And more importantly, it will help increase the usage of the yuan internationally.
Finally, instead of dancing to Trump’s tune, we should focus on our own business, which is, in essence, reform and opening-up.
Huang Yiping is a deputy dean of the National School of Development at Peking University, and chairman of the academic committee at the China Finance 40 Forum.
The article is excerpted from a speech he gave at the China Finance 40 Forum’s Yichun meeting on Saturday. It has been edited for length and clarity.
Translated by Guo Yingzhe (firstname.lastname@example.org)
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