Currency Manipulators: What is it and What happens?

After the election, we are familiar with the argument:

With a weak yuan, products exported from China are cheaper in the U.S.

Conversely, U.S. products are more expensive in China.

What would happen if the Treasury declared China a “currency manipulator”?

The U.S. Treasury makes this decision based on three criteria (I won’t bore you with too much detail)

– focused on bilateral trade surplus
– more than 3% current account surplus
– foreign exchange purchases more than 2% of GDP.

You know who is else is on this “watchlist” of currency manipulators?

Switzerland, South Korea, Japan, Germany, and Taiwan.

So when could this *officially* happen and does it rise to much more than name calling?

April and no. But expect lots of name-calling until then…

So why do this?

First, it’s politically expedient. (Bill Clinton did it. Mitt Romney talked about it. Donald Trump said he would do it on “day one”.)

Second, and here’s the real reason, it would bring China (eventually) to the table to begin renewed bilateral trade discussions. Certainly President Trump would try and use this as a way to get concessions from China.

By the way, this would happen s-l-o-w-l-y. The initially process of letting China appreciate the currency is minimum a year. (More on that in moment…) There are no immediate tariffs on their exports to the U.S.

When was the last time China was declared a currency manipulator?

1994 during the Clinton administration.

So why the fear and volatility in the markets?

China will likely not come to the negotiating table in any hurry.

And why would they?

They have one year by U.S. law after the Treasury declares China a currency manipulator.

China will certainly turn to the IMF about the currency manipulator label. (Remember they joined the IMF reserve currency “club” last year.) They would also turn to the WTO.

In the meanwhile global markets could panic as Earth’s two largest economies engage in an economic tussle. Think: Poor investor confidence.

And President Trump does have the ability to impose trade sanctions.

That’s when China would turn to the WTO since they would be the ones to oversee global commerce and trade dispute issues.

The real concern is the jitters over a contentious US-China trade relationship with the new administration.

There’s no denying the global perception is that it is off to a rocky start. When then President Elect Trump took a congratulatory phone call from the Taiwanese President, this certainly gave the the State Department some sleepless nights. In Beijing’s eyes Trump seemingly disregarded the “One China” policy.

Would China dump U.S. bonds if this were to occur?

The Obama administration did not believe that China met all three criteria of being a currency manipulator. However, in 2009 when the administration did impose tariffs on Chinese tire imports, China did imposed a tariff on U.S. chicken…or was it chicken parts. But you get the picture.

Two stock names that could get caught up in the crossfire are Boeing and Apple.

However it is unlikely that China would dump bonds but keep in mind: China have been selling bonds for the past year. About over 250 billion dollars worth. (And that’s probably a conservative estimate.)

Facebook Comments: