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The U.S.’s abrupt declaration on Monday that China is no longer a currency cheat — two days before the signing of a trade deal with Beijing — shows how President Donald Trump has turned a routine, technical report on foreign exchange into a political cudgel.
“It’s absolutely being used as a bargaining tool,” said John Doyle, a foreign currency strategist at Tempus Inc. in Washington. “We will look at that report now and wonder: Who are they going to flip on next if its politically convenient to get a deal done?”
Treasury’s semi-annual report has long offered markets crucial signals about U.S. policy toward countries it deems to be manipulating their currencies. Using the report for other means — such as leverage to finalize a trade deal — risks undermining the weight of the designation if markets start to take it less seriously.
The offshore Chinese yuan strengthened to 6.883 per dollar on Monday following reports that the U.S. would drop the label.
In the first five reports released by Treasury Secretary Steven Mnuchin, he refrained from labeling China a currency manipulator, despite increasing pressure from the White House. Mnuchin told the White House multiple times that there was no justification for such a ruling, but in August Trump overrode that decision after the yuan dropped dramatically in response to U.S. trade tariffs, according to people familiar with the matter.
Trump was even involved in drafting the press release. He called Mnuchin multiple times to discuss how the message would be transmitted, directing Mnuchin to refer to China as a “Currency Manipulator,” using capital letters, according to a person familiar with the matter. It was the first time the U.S. had labeled another country a currency manipulator since 1994, when it also took aim at China.
To justify the decision in August, Mnuchin used a 1988 trade law with a looser definition of manipulation, rather than the more current 2015 law that requires the twice-a-year report to Congress. Under the more recent law, China does not meet the three criteria to be designated a currency cheat.
“The Trump administration has adopted a different definition of manipulation than the standard definition for China,” said Brad Setser, who worked at Treasury during President Barack Obama’s administration and is now at the Council on Foreign Relations. “It isn’t seeking that China step back from guiding the foreign exchange market; rather, the administration wants China to resist depreciation pressure.”
The International Monetary Fund declined to endorse Trump’s view on the yuan, saying last year that the currency was “fairly valued.”
But it’s not the first time Treasury has been accused of playing politics with the report. During the financial crisis that began in 2007, Treasury secretaries under both George W. Bush and Obama stopped short of saying China cheated in currency markets. Instead, the U.S. warned Beijing about its “severely unbalanced” currency.
In the latest currency report released on Monday, Treasury said that no major trade partner is manipulating its currency, and named 10 countries on its monitoring list, including China.
“Introducing such a blatant political act with the August designation — one that flew in the face of Treasury’s own criteria — lowers the integrity of the report around the world,” said Mark Sobel, who oversaw the Treasury’s report from 2000 to 2015 as a civil servant. “Others will use this precedent in the future to dismiss the Treasury report, even when Treasury has merit.”
Smaller countries on the brink of being labeled manipulators — such as Vietnam and Thailand– may feel the impact the most.
In April, when Vietnam learned that it may be designated a currency manipulator — a label that comes with no immediate penalties but can rattle financial markets — Vietnamese government officials flew to Washington to present additional data showing the country does not artificially hold down the value of the dong.
Vietnam was spared in Treasury’s currency report, in which the U.S. instead said it’s closely monitoring the dong.
Now, Thailand appears to be at risk of being designated in the April Treasury report that will review data from the second half of 2019. Its trade surplus in November reached $20.5 billion, putting it in violation of a $20 billion threshold that Treasury has set for bilateral trade-goods deficits. It also has a higher current account surplus than Treasury allows. U.S. and Thai officials are in “close dialogue” over the shift, according to the Bank of Thailand’s governor.
Trump’s so-called phase one China deal is expected to be signed in Washington on Wednesday, although Chinese President Xi Jinping will not attend. Talks for a second phase agreement continue. The administration is expected to release the text of the accord, which will include a currency chapter.
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