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Hao Zhou, Analyst, Commerzbank

Hao Zhou, Senior EM Economist at Commerzbank

Trump and CNY – who’s the manipulator?

  • Investors and market participants are curious whether President Trump will label China as a currency manipulator.
  • According to current criteria, this is unlikely. This assumes the criteria remain unchanged, which is a big assumption.
  • We analyse the salient points and argue that preventing modest CNY depreciation in 2017 would create far more problems than it solves.

Interesting times...

“Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete, heavily tax our products going into their country (the US doesn’t tax them)...” – Donald Trump, Twitter, 4th December 2016. The above comment followed a diplomatic refrain from China because of Trump’s telephone conversation with the Taiwanese president, Tsai Ing-wen. So it’s important not to take the comments out of context and immediately assume that President Trump will continue as he started during the campaign. We hold the view that political and economic realities will constrain the more excessive aspects of Trump’s campaign rhetoric. It’s noteworthy that already some of the more unpleasant aspects of Trump’s policies have been sidelined. Nonetheless, if we take Trump’s comments at face value then we have to question whether China will be labelled as a currency manipulator.

US Treasury criteria...

The US Treasury has three criteria3 it follows to determine whether a country is manipulating its currency. These are:

  • Significant bilateral trade surplus (at least USD20bn)
  • Material current account surplus (in excess of 3% of GDP)
  • Persistent one sided FX market intervention (net purchases of foreign currency totalling in excess of 2% of the economy’s GDP over the preceding 12 months

According to these criteria China does not meet the definition of a currency manipulator. One might surmise that Germany is closer to being labelled a currency manipulator than China! What investors should remember is that Trump, if he is serious about what he says, won’t allow definitional issues get in the way of his agenda. He’ll simply change the criteria!)

Real issues are being overlooked...

It’s received wisdom that China benefits from having an excessively cheap currency. This refrain has become so deeply imbedded in the common psyche that almost everyone holds the same view. While this may have been true a few years ago it’s certainly not the case now. A cursory look at China’s REER development (Charts 1 & 2) over the last few years shows that CNY appreciated the most of all the EM currencies. We hate for a fact to spoil an argument but it’s crystal clear to us that China doesn’t benefit from an excessively weak currency.


Obviously, once China is further along the path towards a consumption based economic model it will benefit more from having a stronger currency (via increasing purchasing power etc.) but this is a medium term concern. For the moment, it’s in the interest of most major economies to assist in China’s rebalancing process. The politics here are fascinating. The Chinese leadership are concerned with maintaining social and economic stability and anything which threatens the status quo will beconsidered a threat. In our view the Trump team should be careful what they wish for.

Exchange rate reality makes a mockery of Trump’s claims...

Since 2014 PBoC have been sellers of USD, not buyers. These USD sales prevented a more severe depreciation of CNY exchange rates. It’s a nonsense to argue that the Chinese are actively weakening their currency when in fact their USD sales prevent a more severe CNY depreciation. The problem is If capital outflows continue at their current pace, we may well come to a situation where PBoC allows a more substantial CNY depreciation in order to preserve scarce FX reserves. That’s when things could get really tricky.