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  May 3rd, 2018 | Written by

Currency Manipulation: Not a Concern for US-China Trade

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  • Trump’s threat to label China a currency manipulator never happened.
  • When Beijing devalued its currency in August 2015, Chinese exports did not soar.
  • Intervention to support the renminbi in recent years caused money to flee China.

For all of the talk of a trade war between the United States and China, there is one issue that should be off the table, according to one expert, when it comes to trade relations between the two countries: currency manipulation.

President Donald Trump uttered that phrase on numerous occasions when he was running for president, saying he would label China as a currency manipulator on day one of his administration, and hand sanctions around the necks of the Chinese to go along with it. Of course, that never happened.

Many experts say that the Chinese central bank has not been manipulating the currency for the last several years. And, according to an article by Derek Scissors of the American Enterprise Institute in The Hill, when the central bank intervened to support the renminbi in recent years, it did not achieve the results it had hoped for. On the contrary, it shot itself in the foot.

Devaluation of the RMB would presumably have boosted Chinese exports and exacerbated the US trade deficit, the bane of Trump’s existence. But when Beijing devalued its currency in August 2015, “Chinese exports did not soar,” Scissors wrote. “Instead, money fled the country” because holders of RMB figured the currency would become less valuable.

Not having learned that lesson, the People’s Bank committed the same error in January 2016. “Capital exit was slower this second round,” according to Scissors, “but the cumulative effect was enough to trigger global concern about a balance of payments crisis.”

But the Chinese finally learned their lesson after that incident and Beijing imposed new restrictions on capital leaving the country toward the end of 2016, which had the effect of reversing the RMB’s slide against the dollar. In fact, the Chinese currency increased by seven percent rise against the greenback in 2017. Another devaluation would mean money leaving again, and that would go directly against China’s policy goals.

So, don’t look for another devaluation of the renminbi. “There’s little reason to believe it would hurt the United States,” wrote Scissors, “and plenty of reason to believe it will hurt China.”