Comments made Sunday by US president-elect Donald Trump on Twitter have sparked fresh speculation as to whether his administration will label China a currency manipulator once he is in office.
China lodged a formal complaint to the US government after it emerged that Trump held a phone call with the President of Taiwan on Friday, in breach of decades of diplomatic protocol.
“I can tell you that the Chinese side has lodged solemn representations with the relevant party on the US side both in Beijing and Washington. China has got its message across to the world as a whole with regard to Taiwan-related issues. The US side, president-elect Trump’s team included, is also fully aware of China’s solemn attitude on the issue,” said the Chinese Foreign Ministry spokesperson, Lu Kang, in a press conference today.
Following these complaints, Trump took to Twitter to claim that the president of Taiwan contacted him to congratulate him on his election victory, and then noted that it was “interesting how the US sells Taiwan billions of dollars of military equipment, but I should not accept a congratulatory call”.
Then on Sunday, Trump again tweeted on the issue, stating: “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 U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!”
Kang refused to be drawn into providing a detailed response to Trump’s comments at the press conference, instead deferring to the official representations that had already been made.
However, in relation to the economic issues raised in Trump’s tweets, Kang said: “I think it is very clear to all that for many years, China-US economic and trade relations have been highly mutually beneficial aiming for win-win results, otherwise it could not have been where it is today.
“To maintain such sound momentum of development, it will take both sides to work together on the basis of upholding major principles in bilateral relations. We will not speculate on what motivates President-elect Trump and his team into taking certain moves. But we will surely make ourselves clear if what they say concerns China.”
This hasn’t stopped FX market participants speculating on whether a Trump administration will actually label China as a currency manipulator.
Simon Derrick, chief currency strategist at BNY Mellon in London, says that although it is unclear what policies Trump will pursue once in office, the accusation that China is manipulating its currency has been a “consistent theme” since the start of his election campaign.
Despite this, he notes that there have been occasions in the past when Chinese currency manipulation has been a major talking point on successful presidential campaigns, only to become an issue that disappears shortly after a candidate takes office.
For example, in January 2009, two days after Barack Obama took office, Treasury Secretary nominee Timothy Geithner wrote to a senate finance committee that the president believed that China was manipulating its currency. But the US Treasury never officially named China as a currency manipulator and since then has softened its stance on China’s currency policy.
Greg Anderson, global head of FX strategy at BMO Capital Markets, highlights why it might actually be more difficult for the Treasury to name China as a currency manipulator now than it would have been in 2009.
“What’s different between now and then is that Congress passed a new law in 2014 designed to give the Treasury more oversight tools to work with, and this new law gave it more flexibility to name countries as currency manipulators and gave it more flexibility to set what it means to “manipulate” a currency.
“Although they’re not statutory rules, what happened is that the Treasury interpreted this flexible law and produced a set of quantitative stipulations for what constitutes currency manipulation,” says Anderson.
These quantitative stipulations include that the country must have a 3% of GDP current account surplus, a 2% of GDP reserve accumulation and a significant bilateral trade balance surplus.
“In hindsight, this threshold would have said that China was a currency manipulator between 2004 and 2009, but would mean that China is not a currency manipulator in 2016 by any stretch of the imagination,” notes Anderson.
As Derrick notes and Profit & Loss previously reported, one of the curious things about Trump’s continuing accusations of currency manipulation against China is that the authorities there have actually been intervening this year to strengthen the currency, which favours the US’s balance of payments.
“Over the past two years, China’s FX reserves have fallen by about eight or nine hundred billion dollars. There have been points where they were spending one hundred billion per month, but they weren’t manipulating their currency to be artificially weaker, they were supporting their currency,” observes Derrick.
Even if the US does name China as a currency manipulator, it is unclear what impact this would have.
In the relevant legislation, it says that if a country is deemed to be a currency manipulator, then “the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage”.
In short, even if China is labeled a currency manipulator by the US, all that would initially ensue is a series of negotiations between the two countries to try and implement some changes in policy that are acceptable to both sides.
What the currency manipulator designation does that is significant, says Anderson, is that under US law it would allow tariffs against Chinese imports to be raised up to 45%. He adds though, that he does not think that this is the actual goal of the future Trump administration, instead predicting that the administration will use the threat of the currency manipulator designation as a tactic to help it negotiate advantageous terms when dealing with China.
But Anderson also warns: “The problem is, when you have an economic weapon and you threaten to use it and the other side says, ‘If you use your weapon we’ll use our weapon’, then you can talk yourself into a war. That’s the danger of talking about your weapons.”
Ultimately, it’s difficult to predict whether Trump will continue to press his currency manipulation claims once in office, says Steven Englander, managing director, head of G10 FX at Citibank.
“The issue that he raised in his tweet are issues that he raised throughout his campaign and I’d say this is the first instance since the election in which he’s pushed trade intervention forward rather than pushed it into the background.
“You don’t know what to make of it, it could be telling you what he means is to get tough on China on trade – and part of this is dealing with them in other domains as well,” says Englander, also noting that Trump’s tweet had no impact on the markets and that comments from Wilbur Ross, who has been picked as Commerce Secretary by Trump, that appeared in the press last week indicate that he thinks tariffs are simply a negotiating tool in trade discussions.
Indeed, Trump’s comments about currency manipulation might prove to be far less significant than his relationship with Taiwan.
Jason Leinwand, co-founder and CEO of FirstLine FX, says that he thinks it unlikely that a Trump administration will label China as a currency manipulator and thinks that much of the rhetoric from his election campaign is likely to be tapered down once he is in office. In contrast, he says that Trump’s conversation with the president of Taiwan is harder to understand.
“I think that a decent majority of things that he said on the campaign will be rolled back. With regards to China, I can’t envision him and his policy advisors agreeing to label them a currency manipulator.
“But what I’m still trying to wrap my head around was what happened with the Taiwanese president. Trump’s response was that they called him and, if that’s true, that’s a very bold move on Taiwan’s behalf because they know the rules. If [Trump] opens up relations with Taiwan that’s going to be very detrimental to the US’s relationship with China,” says Leinwand.
Kang underscored this point in today’s press conference. While he said that China will only comment on things that have happened rather than “conjecturing about the considerations behind what was said and done by President-elect Trump and his team”, he stressed the importance of Taiwan to China-US relations.
“As we have been saying and as you all know, Taiwan-related issues remain the most significant and sensitive part in China-US relations. China-US relations have been moving forward for nearly 40 years since the establishment of diplomatic ties.
“The One-China policy and the basic principles embodied in the three joint communiqués between China and the US remain a solid political premise of the sound and steady development of bilateral relations and mutually beneficial cooperation. China-US relations and mutually beneficial cooperation will embark on a brighter future only if the two countries hold fast to this political premise,” said Kang.