Is China manipulating its currency?

United States President Donald Trump has often been critical of China for weakening its currency, the yuan, which helps Chinese exporters. Even after assuming charge as president Mr Trump has called China “the grand champion of currency manipulation”. In a report released in October 2018, however, the US Treasury refrained from calling China a currency manipulator, though it decided to keep China on the watch list along with Germany, Japan, Switzerland, Korea and India.   

Patti Domm of CNBC noted that this decision came amid an escalating trade conflict with China that could ultimately lead to the US imposing tariffs on all Chinese exports until the conflict was resolved. In fact, recently, the US had expressed concern when the yuan edged near 6.93 to the dollar, but it was pointed out that China was trying to hold the currency back from falling further to seven to the dollar.              

In the wake of Mr Trump’s continued attack on the Chinese currency, The Economist (May 2, 2017) carried an article which examines whether China qualifies to be called a currency manipulator. Though the criteria adopted by the US Treasury to identify countries that indulge in currency manipulation are considered inadequate, China does not come close enough to be called a currency manipulator, even by those flawed criteria.

The US Treasury adopts three criteria: Whether the country has a sizable trade surplus with the United States; whether its current account surplus exceeds three per cent of GDP; and whether the country spends more than two per cent a year to purchase foreign assets to depress the value of its currency.        

As per its latest available report when this article appeared, China met only one criterion — it was running a very large surplus in its bilateral trade with the US.

The Economist has developed a crude scoring system to identify those countries that would qualify as currency manipulators. Using the current account metric, one manipulation point is awarded to countries with surpluses at the three per cent threshold, and two points to countries with surpluses at six per cent of GDP spent for bringing in foreign assets to depress the value of their currencies. Bilateral trade with the US is not included in this scoring system, under which South Korea and Taiwan scored higher than China.

The highest score, however, went to Switzerland, which has a large current account surplus and hefty foreign asset purchases. Incidentally, the Swiss franc is easily the most over-valued currency in the world.

According to The Economist, China has been trying hard to prop up its currency against the backdrop of large capital outflows and China's score is negative. In other words, China has raised the value of its currency. The scoring system shows that over the past decade China has “progressively done little to distort the value of the yuan.” This is reflected in the verdict of the International Monetary Fund that the Chinese currency is “no longer undervalued.” 

But all this does not mean that China has never been guilty of currency manipulation.              
With the end of the recession in March 2009 and the consequent recovery, all the emerging economies of Asia witnessed surging capital flows, leading to significant appreciation of their currencies to the point of destroying their export competitiveness. During his maiden visit to Beijing in November 2009, the then US President Barack Obama called upon the Chinese government to allow the country's currency to appreciate further. But the then Chinese President Hu Jintao chose to ignore the demand.  
The Chinese currency was held at 6.83 to a dollar between mid-2008 and mid-2010. Prior to this, the dollar-yuan exchange rate moved from 8.11 yuan to a dollar to 6.83 between July 2005 and July 2008. Between June 2010 and July 2013, the yuan appreciated from 6.83 to 6.17 against the dollar. The US, the European Union and the IMF had individually and collectively taken all possible measures in 2009 to persuade China to move away from its fixed exchange rate regime to a market-oriented system. All this fell on deaf years.

In August 2015, however, the Chinese yuan was devalued. This move was seen against the backdrop of China’s anxiety to have its currency included in the SDR basket. The IMF had found that while the Chinese currency met the requirements as a significant currency in terms of international trade, the yuan had failed to meet the requirements as a freely usable currency.

The yuan was finally included in the SDR basket in late 2015. There is no denying the fact that China had remained a currency manipulator till about five to six years ago. It was only after the inclusion of its currency in the SDR basket that China has moved away from its earlier avatar of a currency manipulator.    

The writer was formerly with the International Monetary Fund, Washington DC