“It’s the only issue that Trump and China agree on,” said Andrew Polk of Trivium China, a Beijing-based economics consultancy. “Neither of them wants the currency to depreciate.”
Yet this is not so much a case of the yuan being weak as it is of the U.S. dollar being strong, economists say. The dollar has been strengthening as the world’s biggest economy grows robustly, fueled by President Trump’s tax cuts, and as the Federal Reserve has raised interest rates.
In this intensifying trade war, however, everything is fair game, and the currency could be the next line of attack for the Trump administration.
“The U.S. is trying to put everything under the microscope,” Polk said. “No stone is going to go unturned in terms of complaints.”
Trump has repeatedly accused Beijing of trying to gain a competitive advantage by keeping its currency artificially weak, which makes its exports cheaper. This increases the trade imbalance, which stands at more than $350 billion in China’s favor.
The fall in the yuan this year almost entirely offsets the 10 percent tariffs that Trump has imposed on $250 billion worth of Chinese goods — something that the president sees as evidence of currency manipulation.
But Trump’s Treasury Department on Wednesday stopped short of declaring China a currency manipulator when it released its semiannual report to Congress on foreign exchange. To be labeled a manipulator, a country must meet three conditions, but China meets only one or arguably two of the three. It cannot be proved to be making persistent, one-sided interventions in its market, analysts say.
The report said China’s direct intervention in the currency market has been “limited,” but Treasury Secretary Steven Mnuchin took the opportunity to issue a stern warning to Beijing.
“Of particular concern are China’s lack of currency transparency and the recent weakness in its currency,” Mnuchin said in a statement. “These pose major challenges to achieving fairer and more balanced trade, and we will continue to monitor and review China’s currency practices, including ongoing discussions with the People’s Bank of China.”
But if the People’s Bank stopped managing the exchange rate, that would be bad news for the Trump administration. The bank’s “limited” interventions appear to have been aimed at stopping the yuan from falling too much and too quickly — exactly what Trump and Mnuchin also want.
The central bank sets a price for the exchange rate every morning and allows trading only in a 2 percent band on either side, its way of avoiding too much volatility in its currency. Last week, reflecting the market trajectory, the central bank set the price at 6.9 for the first time in a decade, and it has remained there. The yuan slipped to 6.9378 to the dollar in trading Thursday.
The central bank’s governor, Yi Gang, has pledged not to use the yuan as a tool in the trade war.
“We will not engage in competitive devaluation and will not use the exchange rate as a tool to deal with trade frictions,” he said at a conference last weekend in Indonesia, where he met with Mnuchin. Instead, he has repeatedly called for stability in markets.
While the yuan, like other major currencies, has weakened against the dollar as the American economy has strengthened, it has risen against its other trading partners. On the whole, though, it is down 4.5 percent this year when compared with all of China’s trading partners.
“In trade-weighted terms, the renminbi is fine,” said Michael Spencer, chief economist in Asia for Deutsche Bank.
Most analysts expect China’s central bank to stop the exchange rate from breaching the seven mark for the time being. It wants to avoid antagonizing the United States as the trade dispute rumbles on — especially ahead of an expected meeting between Trump and President Xi Jinping next month.
And it wants to avoid spreading alarm in the Chinese economy. “Persistent depreciation of the renminbi will only do more harm than good to our economy,” Premier Li Keqiang said at a conference last month.
A continued fall in the yuan could spook investors and encourage Chinese to send their money abroad, which would further weaken the currency.
While the U.S. economy is robust, the world’s second-largest economy is cooling, and Chinese policymakers are trying to manage the slowdown.
“On the Chinese side of the ledger, the economy has shown signs of softening over the course of 2018,” said Mark Sobel, a former Treasury Department official. “Beijing's macroeconomic policy is clearly aimed at accommodation, providing support to the economy,” he wrote in a recent note.
Official growth statistics for the third quarter will be released Friday, and polls by Reuters and Bloomberg show economists expect the Chinese economy to have expanded by 6.6 percent in the three months between July and September. This would be the slowest growth rate since the global financial crisis in 2009.
The Chinese government predicts growth for the year will be 6.5 percent, remaining flat compared with 2017.
Reflecting fears about the slowdown and about the trade war, China’s stock markets have also plummeted precipitously. The Shanghai Composite Index has fallen more than 30 percent this year.
Chinese exporters are bracing themselves for the impact of more tariffs, knowing that the depreciation in the yuan will not protect them if Trump makes good on his threat to raise American duties to 25 percent in January.
The yuan’s fall this year has made the first rounds of American tariffs tolerable, although through “gritted teeth,” said Li Yi, owner of a leather factory in Guangzhou.
But if the tariffs go up to 25 percent, it will be more than he can stand. “I might have to reduce my workforce from 100 to about 50,” he told local magazine Nanfeng Chuang. “There's no other way.”