- Yesterday, the United States declared China a currency manipulator. During his 2016 presidential campaign, Donald Trump had talked about designating the country as a currency manipulator.
- Stock markets fell sharply amid the escalation in the US-China trade war.
China declared currency manipulator
The United States has officially declared China a currency manipulator. According to the U.S. Department of the Treasury’s August 5 press release, “Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator. As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”
The Department of the Treasury cited a report presented to Congress on major trading partners’ foreign exchange policies. Its press release noted, “In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.”
Trump floated the idea of naming China a currency manipulator
Although Trump talked about designating China a currency manipulator during his 2016 campaign, he later backed away from that action. Last month, Trump lashed out at Europe and China for currency manipulation. Notably, Trump sees the European Central Bank’s stimulus and dovishness as a tactic to weaken the euro. While the US-China trade war stays in the spotlight, trade relations with Europe aren’t faring much better.
What’s the trigger?
Let’s look at the trigger for finally identifying China as a currency manipulator. Firstly, the US-China trade talks don’t seem to be going the way President Trump would ideally want. Although China and the United States concluded their in-person trade talks last week, they didn’t release the customary statement.
After the talks, Trump announced tariffs on another $300 billion of Chinese goods, which would become effective next month. Notably, Trump increased tariffs on $200 billion of Chinese goods in May, accusing the country of reneging on its commitments.
The yuan slips to its lowest point in a decade
Meanwhile, the final trigger looks at the recent slide in the Chinese currency. China let its controlled currency slide below 7 against the US dollar yesterday, falling to its lowest level in a decade versus the US dollar.
China’s currency devaluation could be seen as a sign of retaliation against Trump’s recent tariff salvo. However, given the timing, it would be fair to see it as currency manipulation.
Stocks slide after China designated a currency manipulator
The US markets opened higher today, and equity markets have had a tough run in August so far. Notably, markets were banking on the Federal Reserve and the US-China trade talks to lift sentiments. While the Fed lowered rates, its comments on future rate cuts spooked the markets. The escalation in the US-China trade war could propel the Fed to hasten its rate cuts. As for the US-China trade talks, the situation could worsen after China’s designation as a currency manipulator.
The SPDR S&P 500 ETF (SPY) is down 4.6% for the month based on yesterday’s closing prices, posting its best first-half returns since 1997.
Apple (AAPL), Amazon (AMZN), Facebook (FB), and Alphabet (GOOG) have posted downward price action of 9.2%, 5.5%, 6.4%, and 5.3%, respectively, in August. Notably, these tech giants were among the companies that opposed the tariffs on China.
Big tech companies are also facing antitrust heat. Last month, executives from Amazon, Apple, Facebook, and Alphabet testified before lawmakers as part of an antitrust probe.
China could retaliate after the US declares it a currency manipulator
China is also appearing to play hardball after being declared a currency manipulator. The country has stopped purchasing agricultural products from the United States.
CNBC reported, “A spokesperson for the Chinese Ministry of Commerce said Chinese companies have stopped purchasing U.S. agricultural products in response to President Trump’s new 10% tariffs on $300 billion of Chinese goods.”
How China further retaliates after being labeled a currency manipulator remains to be seen. However, if the past is any indication, we can’t expect China to back away from retaliation.