Yu Yongding

Opinion | Why Trump picked the wrong fight with his designation of China as a currency manipulator

The Chinese central bank’s decision to let the yuan fall below 7 per US dollar had little to do with trade or currency wars. Rather, it represented an important step towards reforming China’s inflexible exchange-rate regime

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The Chinese monetary authorities let the yuan slide past the key level of 7 per US dollar in August. Photo: Reuters

Yu Yongding

Published: 11:00pm, 5 Sep 2019Updated: 11:35pm, 5 Sep 2019

In early August, the renminbi’s exchange rate broke through the psychological threshold of 7 yuan per US dollar. While investors were still digesting the full significance of this event, US President Donald Trump’s administration startled the market by labelling China a “currency manipulator”.

The designation is absurd, to say the least, because China doesn’t meet the US government’s own criteria for being a currency manipulator. In fact, the decision by the People’s Bank of China to let the renminbi fall below 7 yuan per dollar had little to do with trade or currency wars. Rather, it represented an important step by the PBOC towards reforming China’s inflexible exchange-rate regime.

True, the PBOC did intervene for a long time in the foreign-exchange market. During the 1998 Asian financial crisis, for example, it adopted a de facto peg of the renminbi to the US dollar, which was a key factor in restoring stability to the region’s financial markets.

After 2003, the PBOC intervened to prevent the renminbi from appreciating, because of fears that a stronger currency would hurt China’s growth. The Chinese authorities de-pegged the renminbi from the dollar in 2005. And following a temporary re-peg during the 2008 global financial crisis, China adopted an exchange-rate regime in 2010 that the International Monetary Fund classified as a crawl-like arrangement.

Since late 2014, however, appreciation pressure on the renminbi has waned. In August 2015, the PBOC tried to take a decisive step from a soft peg towards a floating exchange-rate regime by declaring the central parity of the renminbi’s exchange rate against the dollar would be determined by the previous day’s closing price.