US labels China a Currency Manipulator

The US has declared that China as a currency manipulator. The move could further fuel the ongoing trade war between the two countries. The US has alleged that China’s Central Bank is pushing for depreciation of Yuan as retaliation for new US tariffs.

Why China is called Currency Manipulator?

It has been alleged that People’s Bank of China (PBOC) which is the central bank of China has allowed the Yuan to suddenly depreciate relative to the dollar by 1.9 per cent. This was one of the biggest single-day falls and the yuan breached the 7-to-a-dollar-mark for the first time since 2008.

The FX report released by the US Treasury Department made the following observations:

  • The yuan’s depreciation against the dollar was much more than its depreciation against a trade-weighted basket of 24 currencies.
  • The yuan depreciated more than what it should have due only to the known interventions by the Chinese central bank.
  • The People’s Bank of China is using China’s state-owned enterprises to do its dirty work.
  • The Chinese authorities intervene more assiduously when the yuan starts appreciating against the dollar, but look the other way when the yuan starts weakening.

Currency Manipulation

  • Most governments and central banks across the world are bothered about generating more growth and employment. To pursue this goal a weaker domestic currency comes in very handy when governments are trying to attract foreign demand and boost exports.
  • Currency manipulation happens when governments try to artificially tweak the exchange rate to gain an “unfair” advantage in trade. For example, If China’s central bank buys dollars in the forex market, it can artificially weaken the yuan and Chinese goods will then become more affordable (and competitive) in the international market.
  • Even though some amount of such “intervention” by central banks is allowed to reduce wild fluctuations in the exchange rate. But excessive and undisclosed interventions are not considered fair.

US course of Action

The US announced that it would approach the International Monetary Fund “to eliminate the unfair competitive advantage created by China’s latest actions”.

The move has also signalled that the ongoing trade war between the world’s two biggest economies was now turning into a currency war as well.

Topics: , , , , , , , , , , , ,