U.S. designates China a currency manipulator, escalating trade war
REUTERS: A yearlong U.S.-China trade war boiled over on Monday as Washington accused Beijing of manipulating its currency after China let the yuan drop to its lowest point in more than a decade.
The U.S. Treasury Department announced late on Monday that it had determined for the first time since 1994 that China was manipulating its currency, knocking the U.S. dollar .DXY sharply lower and sending gold prices XAU= to a six-year high.
The designation by U.S. Treasury Secretary Steven Mnuchin starts a formal process of bilateral negotiations between the world’s two largest economies, and fulfills a promise made by U.S. President Donald Trump on his first day in office.
“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 Treasury Department said.
The IMF had no immediate comment. Last month, the global lender said China’s yuan was broadly in line with economic fundamentals, while the U.S. dollar was overvalued by 6% to 12%.
The Treasury statement, made after the stock trading session ended, sent S&P 500 futures EScv1 down more than 1%, suggesting investors expect Wall Street to open on Tuesday with additional losses following Monday’s drop of 3% on the S&P 500 .SPX.
The U.S. action came after China let its currency weaken 1.4%, sending it past the key 7-per-dollar level for the first time in more than a decade. Beijing also halted U.S. agricultural purchases, inflaming a trade war that has roiled financial markets, disrupted supply chains and slowed global growth.
Even before the formal designation, Trump on Monday accused Beijing on Twitter of manipulating its currency.
“China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!” Trump tweeted.
Trump had stunned financial markets last week by vowing to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1.
In its statement, the Treasury Department said the People’s Bank of China (PBOC) on Monday made clear that Chinese authorities had ample control over the yuan exchange rate despite their rejection of any claims of manipulation.
“This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis,” the Treasury statement said.
It said China’s actions violate its commitment to refrain from competitive devaluation as part of the Group of 20 industrialized countries. Treasury said it expected China to adhere to those commitments and not target China’s exchange rate for competitive purposes.
U.S. law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant bilateral trade surplus with the United States, and persistent one-way intervention in foreign exchange markets.
After determining a country is a manipulator, the Treasury is required to demand special talks aimed at correcting an undervalued currency, with penalties such as exclusion from U.S. government procurement contracts.
The U.S. Treasury had designated Taiwan and South Korea as currency manipulators in 1988, the year that Congress enacted the currency review law. China was the last country to get the designation, in 1994.
Mark Sobel, a former senior Treasury and IMF official, said Mnuchin was probably ordered by Trump to issue the designation.
“It’s ridiculous that they’ve declared China a currency manipulator. They don’t have any meaningful tools to do anything about it, unless they just want to pile more tariffs on,” said Sobol, who now works with the Official Monetary and Financial Institutions Forum, a London-based think tank.