5-Aug-2019: Treasury Designates China as a Currency Manipulator

The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to analyze the exchange rate policies of other countries. Under Section 3004 of the Act, the Secretary must "consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator.

As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.

As noted in the most recent Report to Congress on the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States (“FX Report”), China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market. In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.

The Chinese authorities have acknowledged that they have ample control over the RMB exchange rate. In a statement, the People’s Bank of China (PBOC) noted that it “has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behavior that may occur in the foreign exchange market. This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis.

This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation.  As highlighted in the FX Report, Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China’s exchange rate for competitive purposes. Treasury continues to urge China to enhance the transparency of China’s exchange rate and reserve management operations and goals.

10-May-2019: US-China tariff wars

The US’ decision to hike tariffs to 25 per cent on $200 billion worth of Chinese goods took effect, a move that could impact goods trade in more than 5,700 product categories and spark off another round of tariff wars between the two largest economies of the world.

Beijing has said it would strike back, ratcheting up tensions as the two sides pursue last-ditch talks to try salvaging a deal to avert the crisis.

Trade Impact: The biggest Chinese import sector impacted by the hike in tariffs is the $20 billion-plus category of internet modems, routers and other data transmission devices, alongside printed circuit boards used in a number of US-made products. Furniture, lighting products, auto parts, vacuum cleaners and building materials are also faced with higher levies. The tariffs could hamper the rebound in the US economy, with consumption likely to take a hit as these tariffs would be paid by American consumers and businesses.

India impact: There could be a short-term impact on the stock markets. The benchmark Sensex at the Bombay Stock Exchange has been falling in line with the global markets that have been falling over fears of the escalating trade war between the US and China.

While the concerns last week hovered around the US decision to withdraw waivers on imports from Iran that led to a rise in crude oil prices and fall in equity markets, the growing concern over the escalation of US-China trade war has spooked the market worldwide in the last week.

In the longer run, while a slowdown in the US economy does not augur well for emerging markets, the trade war heralds a silver lining for some countries. India is among a handful of countries that stand to benefit from the trade tensions between the world’s top two economies.

Of the $200 billion in Chinese exports that are subject to US tariffs, only about six per cent will be picked up by firms in the US.

Countries that are expected to benefit the most from the trade war are the EU members as exports in the bloc are likely to grow by $70 billion. Japan and Canada will see exports increase by more than $20 billion each, it said. Other countries set to benefit from the trade tensions include Australia, with 4.6 per cent export gains, Brazil (3.8) India (3.5), Philippines (3.2) and Vietnam (5).