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U.S. branding of China as currency manipulator offers few new remedies


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U.S. branding of China as currency manipulator offers few new remedies

By David Lawder

 

2019-08-06T023722Z_1_LYNXNPEF7504Z_RTROPTP_4_USA-TRADE-CHINA-CURRENCY.JPG

FILE PHOTO: U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo

 

WASHINGTON (Reuters) - Formally declaring China a currency manipulator may scratch a long-term itch for U.S. President Donald Trump, but the move provides few new tools that have not already been employed in two years of trade negotiations with Beijing.

 

U.S. Treasury Secretary Steven Mnuchin issued the declaration late on Monday, after China's central bank let the yuan slip below the psychologically important level of seven yuan to the dollar.

 

The move marks the first manipulator designation since 1994, when China was declared a manipulator.

 

The main purpose of such designations under a 1988 U.S. currency law was to force negotiations with the offending country over their foreign exchange practices, but the United States and China have been locked in comprehensive trade negotiations -- including on currency issues -- for more than two years without result.

 

It is difficult to see how a designation will change the situation other than fanning trade and currency war flames, said Mark Sobel, a former senior U.S. Treasury and IMF official who worked on monetary issues.

 

"There's not much here. The remedies are very weak and the IMF already said what it thinks about the yuan," said Sobel, who now works with the Official Monetary and Financial Institutions Forum, a London-based think tank.

 

The IMF said last month that the yuan's valuation was in line with China's softer economic fundamentals, though the dollar was overvalued by 6% to 12%.

 

WHAT HAPPENS NEXT

If a country is found to be manipulating its currency for a trade advantage, Treasury is required by law to enter bilateral negotiations with that country or work through the International Monetary Fund to correct the situation. The aim is to eliminate any unfair advantage brought on by the unfairly devalued currency.

 

If no solution can be found, the president can impose various penalties such as banning Overseas Private Investment Corp financing in that country or excluding it from U.S. government procurement contracts.

 

China is neither a major recipient of government contracts nor financing from OPIC, which is positioning itself with $60 billion in new funding to better compete with China's own Belt and Road infrastructure development initiative.

 

Trump promised during his 2016 election campaign that he would declare China a currency manipulator on "day one" of his presidency. But for over two years, Mnuchin declined to do so in the Treasury's semi-annual currency reports, relying on criteria that showed China's global current account surplus was shrinking and that the yuan level was largely stable after a major drop in 2015.

 

In May, China was again spared a manipulator designation, even with tighter new criteria specifying that global current account surpluses should not exceed 2% of gross domestic product as trade talks continued.

 

TALKING WITH CHINA

Even during the mid-2000s, when China's yuan was widely viewed to be significantly undervalued and its current account surplus approached 10% of GDP, the United States refrained from a currency manipulator designation.

 

At the time, China and the George W. Bush administration were already engaged in bilateral talks on currency and other broad trade and economic reform issues called the Strategic Economic Dialogue. The dialogue was continued and renamed under President Barack Obama and has since been derided by Trump as ineffective.

 

When the U.S. Congress first enacted a currency review law in 1988, there were few international forums for resolving such disputes, well before the launch of the World Trade Organization. The Treasury declared Taiwan and South Korea manipulators that year, and slapped China with such a declaration in 1994.

 

A report by the U.S. congressional Government Accountability office found that all three countries in subsequent negotiations with the United States made substantial reforms to their foreign exchange regimes and saw the manipulator designation lifted.

 

China unified its dual exchange rate system in 1994 after the last designation, and has since pegged the value of its currency to the U.S. dollar.

(Reporting by David Lawder and Andrea Shalal; Editing by Lisa Shumaker)

 

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-- © Copyright Reuters 2019-08-06
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Trump and Munchkin need to realize and should have before tariffs were imposed, that the Chinese don’t give a toss about any US imposed sanctions. In case they haven’t worked it out yet the Chinese are happy to go back to living on rice if need be. Will US farmers and the US public be happy eating their current $57 billion and rising, subsidized soybeans and grits if world economies collapse. 

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2 minutes ago, Roadman said:

Trump and Munchkin need to realize and should have before tariffs were imposed, that the Chinese don’t give a toss about any US imposed sanctions. In case they haven’t worked it out yet the Chinese are happy to go back to living on rice if need be. Will US farmers and the US public be happy eating their current $57 billion and rising, subsidized soybeans and grits if world economies collapse. 

the chinese are not happy living on rice and this is clearly evident in their hardened approach and cheating on all levels... they have been exposed and Trump is doing what needs to be done and keep squeezing eventually they will break...

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4 minutes ago, tlandtday said:

the chinese are not happy living on rice and this is clearly evident in their hardened approach and cheating on all levels... they have been exposed and Trump is doing what needs to be done and keep squeezing eventually they will break...

Because "trade wars are good and easy to win."

And if China has been manipulating its currency, it's to keep it overvalued. In fact, as numerous reports state, what China has done now is to let it drop. And what's bizarre is that on the one hand Trump supporters tout the tariffs' effectiveness, but on the other hand, they claim that China's currency should be valued higher. Doublethink much?

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Not long ago the US wanted less control of China's currency, they wanted the market, not the bureaucrats to determine the price of the yuan.

Well we see what happens when we let market decide....they give it a massive downvote, and only by "manipulating", ie the central bank selling dollars and buying yuan can China bring the currency back. Total BS

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2 hours ago, tlandtday said:

the chinese are not happy living on rice and this is clearly evident in their hardened approach and cheating on all levels... they have been exposed and Trump is doing what needs to be done and keep squeezing eventually they will break...

No way the Chinese want to go back to the 60's. They will revolt if the economy starts to collapse. Maybe this is what Trump is hoping for. After all, it worked for Reagan against the Soviet Union. Make them spend until they are broke.

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6 hours ago, tlandtday said:

the chinese are not happy living on rice and this is clearly evident in their hardened approach and cheating on all levels... they have been exposed and Trump is doing what needs to be done and keep squeezing eventually they will break...

China does not lack for possible countermeasures:

Oil prices could crash by $30 if China buys Iranian crude: BofA

 

Crude oil prices could sink by as much as $30 a barrel if China decides to buy Iranian crude oil in retaliation to the latest U.S. tariff measures, according to Bank of America Merrill Lynch.

“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin,” a BofA Merrill Lynch Global Research report said Friday, warning that prices could sink by as much as $20-30 a barrel in that scenario.

 

The Chinese Ministry of Commerce has threatened countermeasures after President Donald Trump threatened to slap a 10% tariff on $300 billion dollars of Chinese goods. The decision Thursday floored oil markets and sent crude plunging 8% — the most in four years.

https://www.cnbc.com/2019/08/05/brent-and-wti-price-could-crash-if-china-buys-iranian-oil.html

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5 hours ago, Roadman said:

Trump and Munchkin need to realize and should have before tariffs were imposed, that the Chinese don’t give a toss about any US imposed sanctions. In case they haven’t worked it out yet the Chinese are happy to go back to living on rice if need be. Will US farmers and the US public be happy eating their current $57 billion and rising, subsidized soybeans and grits if world economies collapse. 

Republicans dishing out money to farmers. Please say it isnt so. Socialism at its finest.

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25 minutes ago, Brigand said:

No big deal branding the Chinese currency manipulators because, well, actually they are ... and shameless lying ones too.  

Until now, you were right. The Chinese have been manipulating the currency. By keeping it higher than it should be. But now, they've just let it fall without intervening. No more drawing upon their copious cash reserves.

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28 minutes ago, bristolboy said:

Until now, you were right. The Chinese have been manipulating the currency. By keeping it higher than it should be. But now, they've just let it fall without intervening. No more drawing upon their copious cash reserves.

Perhaps ... but if so, then it's a double edged sword for them as they import a lot and they will be paying more for all the materials et al they need from abroad. Must have been a big decision for them to call. I can see them waving the rare earth metal card too as the Chinese have a monopoly on that stuff at the moment. It will cost both sides and ultimately these actions should eventually lead to a proper trade deal but seems both can't trust or play fair one way or another. Can't see the Chinese doing anything till after the next US election as a Dem White House might be easier to deal with so they might be ready to wait it out whatever the cost.

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24 minutes ago, Brigand said:

Perhaps ... but if so, then it's a double edged sword for them as they import a lot and they will be paying more for all the materials et al they need from abroad. Must have been a big decision for them to call. I can see them waving the rare earth metal card too as the Chinese have a monopoly on that stuff at the moment. It will cost both sides and ultimately these actions should eventually lead to a proper trade deal but seems both can't trust or play fair one way or another. Can't see the Chinese doing anything till after the next US election as a Dem White House might be easier to deal with so they might be ready to wait it out whatever the cost.

I think waiting it out is most likely their plan. The question is will Trump be able to wait it out. Now that he's planning to put tariffs on everything, that is going to hurt the US economy and consumers. Particularly Walmart and Dollar General shoppers.

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4 minutes ago, Redline said:

I've read that artice in the past but it actually should provide comfort to those who fear the Chinese juggernaut. Because investment decisions are being made more and more for political reasons rather then economic ones, chinese investments now have a very poor rate of return. It[s a very inefficient investment system. 

 

For example there's one poster on thaivisa.com who frequently extolls the farsightedness of building ghost cities in the expectation that one day the will be full of people working in factories and such that will be built nearby. But the thing is, these ghost cities can wait for years before they are occupied. And money that could have been invested elsewhere to produce immediate results is instead sunk in these non revenueproducing sites.

 

And than there's the problem of GDP. The Chinese government sets targets for this and expects local governments to meet them. It's a crazy way to run an economy since what ends up happening is localities invest in things, well, like ghost cities. So it shows up as an increase in GDP but as an investment is unproductive.

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That is precisely correct not much can be done . China is now so big and powerful that they can get away with anything and they know it . 

 

Just as someone mentioned before , it was us the West who made China into what it is and now we the West do not know what to do about it.

 

On the upside , every empire through the history of mankind fell apart after becoming too great 

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28 minutes ago, Redline said:

This is a great article on Chinese manipulation:

 

https://www.theguardian.com/world/2019/jul/25/china-business-xi-jinping-communist-party-state-private-enterprise-huawei

 

It is the greed of the West that got them into this mess to begin with however

 

Here's a link to an abstract of a paper from the IMF which shows how inefficient state run enterprises are

https://www.elibrary.imf.org/view/IMF001/01558-9781451865738/01558-9781451865738/01558-9781451865738.xml?redirect=true

I can't believe that the IMF charges for access to its library. To keep out the riffraff? Do they really need the money?

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China has the backing of the International Monetary Fund which hasn't deemed China to be guilty of currency manipulation. In a report issued last month, the IMF said it found China's handling of the yuan in 2018 "broadly in line with fundamentals and desirable policies."

http://lite.cnn.io/en/article/h_992f9aee81185e33e689353817ab4100

Why is that meaningful?

  • Now that the United States has applied the label to China, Washington can either engage in negotiations with China or with the IMF, according to a 1988 law. The end goal: to ensure both countries adjust the rate of exchange between their currencies and get rid of any unfair advantage.
  • The U.S. Treasury Department has said it will go straight to the fund to deal with the issue.

As IMF already sided with China, the U.S. that is subject to IMF economic and financial policies will likely lose. That will likely cause Trump (who has already snubbed IMF policies*) to withdraw from the IMF. That will assuredly further crash the U.S. stock market.

 

*  https://www.bloomberg.com/news/articles/2018-12-12/u-s-treasury-opposes-increase-in-imf-s-permanent-capital-levels

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On 8/6/2019 at 7:05 PM, bristolboy said:

I think waiting it out is most likely their plan. The question is will Trump be able to wait it out. Now that he's planning to put tariffs on everything, that is going to hurt the US economy and consumers. Particularly Walmart and Dollar General shoppers.

I think I know trump and he will cave like all cowards do. Cut a terrible deal similar to his bankrumpancies. Lie and announce he has made the most historical deal and his supporters will brag. 

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Chinese currency manipulation is a fact. China hasn't been playing fair for many years. Even Chuck Schumer, no fan of the current CIC, said so. The Chinese do not have a floating currency; they can influence/determine the exchange rate at will. They've done this many times in the past, and will continue to do so, until someone finally plays hardball with them. The Chinese will postpone and postpone until the results of next year's presidential election are determined. They can wait one year, but waiting five (assuming a second term) simply won't be feasible. Getting them to the table, cutting a deal, and verifying compliance will be a second term issue. 

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26 minutes ago, Ramen087 said:

Chinese currency manipulation is a fact. China hasn't been playing fair for many years. Even Chuck Schumer, no fan of the current CIC, said so. The Chinese do not have a floating currency; they can influence/determine the exchange rate at will. They've done this many times in the past, and will continue to do so, until someone finally plays hardball with them. The Chinese will postpone and postpone until the results of next year's presidential election are determined. They can wait one year, but waiting five (assuming a second term) simply won't be feasible. Getting them to the table, cutting a deal, and verifying compliance will be a second term issue. 

So apparently trade wars aren't "so easy to win"?

 

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31 minutes ago, Ramen087 said:

Chinese currency manipulation is a fact. China hasn't been playing fair for many years. Even Chuck Schumer, no fan of the current CIC, said so. The Chinese do not have a floating currency; they can influence/determine the exchange rate at will. They've done this many times in the past, and will continue to do so, until someone finally plays hardball with them. The Chinese will postpone and postpone until the results of next year's presidential election are determined. They can wait one year, but waiting five (assuming a second term) simply won't be feasible. Getting them to the table, cutting a deal, and verifying compliance will be a second term issue. 

The democrats have historically used tariffs more than republicans, so the Chinese are in for a rough time ahead, regardless who win the 2020 US election.

I think the CCP know that the Chinese economy will significantly slow down at some point and then the Chinese state sponsored propaganda machine will kick in to high gear, blaming the perfect external enemy: The US of A.

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31 minutes ago, Ramen087 said:

Chinese currency manipulation is a fact. China hasn't been playing fair for many years. Even Chuck Schumer, no fan of the current CIC, said so. The Chinese do not have a floating currency; they can influence/determine the exchange rate at will. They've done this many times in the past, and will continue to do so, until someone finally plays hardball with them. The Chinese will postpone and postpone until the results of next year's presidential election are determined. They can wait one year, but waiting five (assuming a second term) simply won't be feasible. Getting them to the table, cutting a deal, and verifying compliance will be a second term issue. 

Except of course, if there has been manipulation, it's been by keeping their currency higher than it should be. China demonstrated that when it let the currency fall below 7 to the dollar briefly by withdrawing support.

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28 minutes ago, bristolboy said:

Except of course, if there has been manipulation, it's been by keeping their currency higher than it should be. China demonstrated that when it let the currency fall below 7 to the dollar briefly by withdrawing support.

The ultra strict capital control China implemented after 2015 is part of the manipulation. 

They are manipulating (=controlling) their currency.

That said, they can only do it to a degree, if they go too far it will generate a black market for the Yuan.

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3 minutes ago, ExpatOilWorker said:

The ultra strict capital control China implemented after 2015 is part of the manipulation. 

They are manipulating (=controlling) their currency.

That said, they can only do it to a degree, if they go too far it will generate a black market for the Yuan.

But, if anything, they are keeping it artificially high. But still not by much, as you point out. So, in effect, they are  also lowering the value of the dollar. But again, not by much,

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On 8/6/2019 at 8:18 PM, bristolboy said:

For example there's one poster on thaivisa.com who frequently extolls the farsightedness of building ghost cities in the expectation that one day the will be full of people working in factories and such that will be built nearby. But the thing is, these ghost cities can wait for years before they are occupied. And money that could have been invested elsewhere to produce immediate results is instead sunk in these non revenueproducing sites.

 

And than there's the problem of GDP. The Chinese government sets targets for this and expects local governments to meet them. It's a crazy way to run an economy since what ends up happening is localities invest in things, well, like ghost cities. So it shows up as an increase in GDP but as an investment is unproductive.

Perhaps you are referring to me. I think I once gave an example of what ghost cities really are in a different conversation and context. You are correct, they can stand almost empty except for maintenance staff for a few years, but there is always a plan for them, they are not built hit and hope. There's no expectation, but there is certainty. Look at the migration of high tech companies from the PRD to central China to save on labour costs for instance. Gansu is a good example. None of that was done on a whim.

 

But the crux of the matter is in your statement 'unproductive investment.' In the west that may be true. In China it's just preparation for the current five year plan. Call China capitalist as much as you want but it's a socialist government. Most provinces are in debt to central government as a result of social projects. There's no pressure coming down from Beijing as long as the provenance of a project can be shown.

 

I have always maintained that western economics don't fit in China. Maybe the Chinese economy does look crazy to those who try and apply, say, Keynsian theory to it, but it seems to be working fine.

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12 hours ago, Traubert said:

Perhaps you are referring to me. I think I once gave an example of what ghost cities really are in a different conversation and context. You are correct, they can stand almost empty except for maintenance staff for a few years, but there is always a plan for them, they are not built hit and hope. There's no expectation, but there is certainty. Look at the migration of high tech companies from the PRD to central China to save on labour costs for instance. Gansu is a good example. None of that was done on a whim.

 

But the crux of the matter is in your statement 'unproductive investment.' In the west that may be true. In China it's just preparation for the current five year plan. Call China capitalist as much as you want but it's a socialist government. Most provinces are in debt to central government as a result of social projects. There's no pressure coming down from Beijing as long as the provenance of a project can be shown.

 

I have always maintained that western economics don't fit in China. Maybe the Chinese economy does look crazy to those who try and apply, say, Keynsian theory to it, but it seems to be working fine.

You should look up "opportunity cost"

And under Xi, it's more and the the privately owned corporations that are propping up the government owned sector of the economy. And that less productive government owned sector is appropriating a larger and larger share of the Chinese economy.Which brings to mind Stein's Law: If something cannot go on forever, it will stop

 

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On 8/13/2019 at 10:35 AM, Credo said:

So apparently trade wars aren't "so easy to win"?

Trade war is a bit of a misnomer... In this instance... All both sides are really trying to do is cut the best deal in a potential future negotiation.  And these negotiations are never easy, unless one side simply gives in to the other.

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On 8/6/2019 at 2:47 PM, Longcut said:

No way the Chinese want to go back to the 60's. They will revolt if the economy starts to collapse. Maybe this is what Trump is hoping for. After all, it worked for Reagan against the Soviet Union. Make them spend until they are broke.

China is nowhere near going back to the 60's.  or even the 90's.  it is a very different country now.  it has developed at a pace never seen in all of human history.  that is not hyperbole but it is also not something anyone, unless you are in China, will repeat to themselves and socially over and over again.  we like our own narratives.  but that China is slowing down.... which means only 6% GDP growth?  as they switch to a service led economy quicker than ever.  today's Nikkei Asian Review labor story on China.

 

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