US claim of currency manipulation tested in Treasury report

Bloomberg

The US Treasury is poised to render a verdict on President Donald Trump’s claim that China is manipulating its currency as a trade war between the two nations intensifies and rattles markets.
While the US hasn’t designated China as a currency manipulator since 1994, Wall Street is bracing for the prospect that the Treasury Department will do so this week in its semi-annual foreign-exchange report. Such a move wouldn’t trigger penalties, but it would likely escalate tensions between the world’s two largest economies.
Treasury staff have recommended to Secretary Steven Mnuchin that China doesn’t meet the criteria to be labeled a currency manipulator, according to two people familiar with the matter. The criteria established by Congress include: a minimum $20 billion trade surplus with the US; a current account surplus in excess of 3 percent of GDP; and repeated interventions in currency markets.
Trump has repeatedly said China keeps the yuan artificially weak, making its exports cheaper. The currency, also called the renminbi, has tumbled more than 9 percent against the dollar over the past six months. The US is concerned about the depreciation, and wants to make sure it’s not being used as a competitive devaluation, Mnuchin said in an interview in Bali.
The yuan’s drop has been fueled at least in part by market forces from the trade dispute, according to Mark Sobel, a former US Treasury official who worked at the department for nearly four decades.
“Trade tensions are contributing to the softening Chinese economy and a weaker currency,” Sobel said. “When Trump threatens, or actually hits China with trade tariffs, the renminbi depreciates. As tensions rose, pressures on the renminbi intensified.”
People’s Bank of China Governor Yi Gang used the IMF meetings to say the government won’t use its currency as a tool to deal with the trade conflict even as a tariff war with the US intensifies. Still, the White House is pressuring Mnuchin to publicly shame China, and Trump said in an interview with Bloomberg News last month that the US is “looking very strongly at the formula” it uses to evaluate possible manipulation. Mnuchin has gotten more involved than usual in the currency analysis, people familiar with the matter have said.