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Neal Kimberley

Worse than being unjustified, Washington’s decision to brand China a currency manipulator was misguided as it could backfire on the US economy.
As for Beijing, it should resist any temptation to let the yuan slide precipitately. That wouldn’t be in China’s own interest. 
The Trump administration’s categorisation of China as a currency manipulator followed a fall in the renminbi’s value to more than 7 to the US dollar.
But, in truth, if China has been influencing the yuan’s value in recent times, its efforts have been directed at tempering renminbi weakness, not facilitating it.
Not only is Washington’s designation of China as a currency manipulator unjustified, it’s misguided and could backfire
Left to its own devices, the currency markets might have delivered such yuan weakness a long time ago. After all, the US-China trade war is hardly breaking news.
So, Washington’s accusation, as it has been framed, is unjustified. It’s also a little absurd.
Washington is effectively condemning China as a currency manipulator after a slide in the yuan’s value that was a direct consequence of Trump’s own decision to flag up yet another proposed extension of tariffs.




That aside, what can Washington do to unnerve Beijing, now it has declared China a currency manipulator? More tariffs? A plethora of tariffs on Chinese goods are already in place and Beijing has hardly quaked in its boots.
If Washington cannot devise effective measures to reinforce its categorisation of China as a currency manipulator, it could appear to be a paper tiger.
But nor should China embrace yuan weakness as a policy option.
A weaker renminbi might make China’s yuan-denominated exports cheaper in foreign currency terms, partially offsetting the impact of US tariffs on Chinese goods, but it’s no panacea.
It increases China’s US dollar-denominated energy import bill in yuan terms.
Currency manipulator tag is not the weapon of US hopes
Many Chinese companies hold substantial US dollar-denominated debt that has to be serviced and ultimately repaid. The weaker the yuan, the fewer greenbacks it buys and the harder that debt management process becomes.
Meanwhile, if the notion takes hold that the yuan’s trajectory is predominantly downward, capital flows out of China might increase. That would be unwelcome; China wants to attract capital, not lose it.




But if China does recognise that its own interests are not aligned with a greater degree of yuan weakness, Beijing has to change the narrative.
Jawboning about the need for yuan stability has its merits but it would almost certainly need to be backed up by the sight of China selling some of its huge pile of foreign reserves for renminbi.
That would surely have to involve selling some US-denominated assets, most likely US Treasuries, to produce the greenbacks to be exchanged for yuan on the currency markets.
By definition, selling US Treasuries has a downward effect on their price and an upward impact on their yield.
Why China remains a good bet even as the trade war escalates
Yet, ordinarily, even with its financial heft, such activity by China would be unlikely to materially move US Treasury prices, given the depth of that market.
But these are not ordinary times.
Markets lowered their expectations for future US inflation despite the decisions by the Federal Reserve on July 31 to both cut rates by 25 basis points and to end quantitative tightening early.
That suggests markets feel US monetary policy is still too tight.

Additionally, last month’s deal in Washington, to suspend the US debt ceiling, can only lend itself to tighter financial conditions in the United States.
Constrained from issuing new paper as it neared the debt ceiling earlier in the year, the US Treasury drew down on funds it holds in its Treasury General Account (TGA) at the Fed. That account needs replenishing.
Oliver Brennan, senior macro strategist at independent investment research provider TS Lombard, observed last month that the US Treasury likes to hold enough cash in the TGA to “cover one week of outflows, which it has estimated at US$325 billion”.
The TGA’s closing balance on August 8 was US$125.67 billion, so the US Treasury has got some work to do.
China’s solution to Trump’s trade tantrums? Treat him like a natural disaster
To raise greenbacks through new issuance, the US Treasury may have to accept lower prices and pay higher yields to tempt buyers, with financial conditions only made even tighter by the fact that the received US dollars will then just sit in the TGA.
This entire US Treasury-led process will, ironically, help tighten US financial conditions at a time when Trump is screaming for looser monetary policy.
Any indication that China was also selling US Treasuries, perhaps in pursuit of yuan stability, would merely exacerbate the situation.
Not only is Washington’s designation of China as a currency manipulator unjustified, it’s misguided and could backfire.
Neal Kimberley is a commentator on macroeconomics and financial markets


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To boost China’s yuan, central bank makes it easier for firms to borrow more foreign debt

China’s central bank rhetoric on yuan stability takes aim at depreciation risks

China’s yuan hits 2-year low, Asian currency pressure rises, as US dollar strengthens

Currency war

How Donald Trump’s currency war may end up hurting the US economy, rather than China

US President Donald Trump has urged the Fed to cut the benchmark interest rate at a faster pace and on a bigger scale, saying the central bank’s “tight” policy is hurting the US economy. Photo: Xinhua

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

The real danger behind US currency manipulation charges against China

A man walks past a money exchange shop decorated with different banknotes at Central, a business district in Hong Kong. Photo: AP

U.S. President Donald Trump speaks during a rally in Cincinnati, Ohio, U.S., on Thursday, Aug. 1, 2019. Trump abruptly escalated the trade war with China, throwing the focus on how Beijing will respond to a step that threatens to scupper the chances of a deal between the two sides. Photographer: Matthew Hatcher/Bloomberg

A container ship unloads it's cargo from Asia, at the Long Beach port, California on August 1, 2019. - President Donald Trump announced August 1 that he will hit China with punitive tariffs on another $300 billion in goods, escalating the trade war after accusing Beijing of reneging on more promises. (Photo by Mark RALSTON / AFP)

China’s solution to Trump’s trade tantrums? Treat him like a natural disaster

US President Donald Trump at a ‘Make America Great Again’ campaign rally in Ohio. Photo: AFP

Traders work at the New York Stock Exchange (NYSE) on August 5, 2019 at Wall Street in New York City. - Selling on Wall Street accelerated early Monday as a steep drop in the Chinese yuan escalated the US-China trade war following President Trump's announcement of new tariffs last week. (Photo by Johannes EISELE / AFP)

A bank employee counts U.S. dollar banknotes next to stack of 100 Chinese yuan notes at a bank outlet in Hai'an in eastern China's Jiangsu province, Tuesday, Aug. 6, 2019. China's yuan fell further Tuesday against the U.S. dollar, fueling fears about increasing global damage from Beijing's trade war with President Donald Trump. (Chinatopix via AP)

China pledges not to devalue yuan exchange rate after US currency manipulator designation

China's central bank set the midpoint exchange rate at 7.0211 on Monday, the third consecutive trading day that Beijing has set a rate weaker than 7 to the US dollar. Photo: Bloomberg

China's central bank set the midpoint exchange rate at 7.0211 on Monday, the third consecutive trading day that Beijing has set a rate weaker than 7 to the US dollar. Photo: AFP

Opinion

Comment

Business


The ‘currency manipulator’ tag may turn out to be a paper tiger. More importantly, if China recognises that yuan weakness is not in its interests and sells US-denominated assets to stabilise it, the sale of US Treasuries could add to a tightening of US financial conditions



The ‘currency manipulator’ tag may turn out to be a paper tiger. More importantly, if China recognises that yuan weakness is not in its interests and sells US-denominated assets to stabilise it, the sale of US Treasuries could add to a tightening of US financial conditions.


Macroscope

US-China trade war

US-China trade war: All stories

Donald Trump

Currencies

Yuan

China economy

Foreign exchange market

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Macroscope | How Donald Trump’s currency war may end up hurting the US economy, rather than China

The ‘currency manipulator’ tag may turn out to be a paper tiger. More importantly, if China recognises that yuan weakness is not in its interests and sells US-denominated assets to stabilise it, the sale of US Treasuries could add to a tightening of US financial conditions