AFP/Getty Images China has been easing policies to help sustain economic growth while the U.S. economy has seeing above-trend growth.
The United States isn’t likely to label China as a currency manipulator in its latest report on foreign currency practices expected to be released in coming days.
Fierce rhetoric about China from President Donald Trump and Vice President Mike Pence led many to conclude that the U.S. might take the step and name China as a currency manipulator.
But it now appears less likely after a report emerged that the Treasury staff has concluded China is not manipulating the yuan.
“The Treasury’s staff seems to be recognizing what analysts already believe: China’s management of the renminbi does not yet reach the level of manipulation,” said Marc Chandler, chief market strategist and managing partners at Bannockburn Global Forex in Cincinnati, Ohio.
“The Treasury staff doesn’t want it. [Treasury Secretary Steven] Mnuchin doesn’t want it,” agreed Leland Miller, chief executive officer of China Beige Book International, a data analytics and economic-forecasting firm focused on China.
Miller said Mnuchin doesn’t want to name China a manipulator because it would interfere with a possible summit meeting between Trump and Chinese President Xi Jinping at the G-20 summit in Argentina in late November.
Read: Mnuchin says Chinese officials told him they don’t want yuan to depreciate further
“It would be a smack in the Chinese face” and Xi would likely cancel any possible talks, Miller said.
U.S. and Chinese trade tensions have been escalating since the summer. The latest U.S. penalties — a 10% tariff on $200 billion of Chinese imports — are slated to rise to 25% at year end.
So some progress between the two leaders might delay these tariffs. The two leaders have not met since late last year.
In total, the U.S, has put tariffs on $250 billion of Chinese imports. China has put tariffs on $110 billion of U.S. exports.
Besides the politics of the moment, another factor behind Treasury’s likely decision not to name China a currency manipulator is that it technically doesn’t meet two of the three criteria set out to evaluate what is manipulation.
Although China’s currency is down 6% this year, Bannockburn’s Chandler said market factors are doing the work.
The dollar DXY, +0.01% has been broadly strong given that the Fed is raising interest rates and the U.S. is seeing above-trend growth. At the same time, China’s economy appears to be softening.
Brian Setser, senior fellow at the Council on Foreign Relations, said in a blog post he still thinks China is managing its currency, to a basket of currencies established over the past two and a half years.
Many analysts think China would allow its currency to weaken to offset the trade tariffs. But Setser said Chinese officials have a tough choice. Once the yuan fell out of the bottom of the recent range, there isn’t an obvious limit to how far it could fall, he said. “Global markets might get nervous.”
Some forex analysts have said the U.S. would be more concerned if the People’s Bank of China let the yuan USDCNY, -0.0737% fall through the 7 to the dollar level. The yuan hasn’t been that weak since the collapse of Lehman Brothers in 2008. One dollar bought 6.9119 yuan in Tuesday trading.
See: U.S. traders wait to see whether Treasury will label China a currency manipulator
Chandler said he thought the importance of a 7 per dollar level was being exaggerated by some forex analysts.
If the Fed continues to gradually raise interest rates as planned, he said the Chinese currency could sink to 7.15 next year.
Chandler said Treasury’s report will include some “cautionary words” for China.
“The report will urge them not to intervene as much and be more transparent when they intervene,” he said.
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