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April 17, 2017

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Dropping currency spat to benefit China, US

DESPITE speculation to the contrary, the US government has decided not to brand China a currency manipulator. After seeking truth from facts, the United States has chosen a direction that will benefit the two economies and the world at large.

In a semiannual report to the US Congress published late on Friday, the Treasury Department declared that no major trading partner of the US, including China, was manipulating its currency.

While it is a sharp reversal from the rhetoric of US President Donald Trump’s campaign trail, nearly three months into his presidency, this different tone chimes with a more realistic view of China’s currency.

It shows his tough talk on China was only campaign rhetoric, said Wei Benhua, a senior researcher at Chongyang Institute for Financial Studies at Renmin University.

Economists have argued that China currently does not merit the label of currency manipulator, and the yuan has been at equilibrium level in recent years.

The Treasury uses three measures to decide if a country is being manipulated: whether the country runs a sizeable surplus in trade with US; whether its current account surplus exceeds 3 percent of GDP; and whether it spends more than 2 percent a year to buy foreign assets to suppress the value of its currency.

China only meets the first criteria by running over US$20 billion of trade surplus with the US, said Zhu Jianfang, chief economist with Citic Securities.

China has spared no efforts to keep the yuan at a stable level over the past few years, exactly the opposite of currency manipulation, he added.

Over the last decade, China’s effective exchange rate has appreciated more than any other major currency, rising more than 40 percent, said David Dollar, a senior fellow at the Brookings Institution.

Brad Setser, a researcher with the Council on Foreign Relations, noted the yuan exchange rate is now close to equilibrium. He expects the yuan to remain stable at the current level with China’s current account surplus and its efforts to deal with capital outflows.

The US administration’s new stance on the currency issue was likely influenced by the recent meeting of the leaders of the two countries in Florida, where they were able to better understand each other, said Zhao Xijun, a finance professor at Renmin University.

With the currency spat subduing, economists said the chance of a trade war between the world’s two largest economies will be slim at most.

“The possibility of a trade war could be ruled out as the US government has dropped the manipulator claim,” Zhu said, adding that the two countries have huge space for cooperation, which is good for both.

“It would be hard for me to imagine a full-on trade war between the US and China as it would be too damaging to the two greatest economies in the world, and it could easily pull the rest of the world into the biggest recession we will ever see,” said John Ling, president of the Council of American States in China.

As many of the new US Cabinet members have experience in the private sector working with China, he said, it was inevitable that there would be disputes and issues but both sides will try to keep a relationship that will benefit the citizens in both countries.

Economists also foresee that the news will help keep the yuan stable.

It seems the market was expecting a stable yuan trading and big fluctuations of the yuan will not occur, Zhao said.

Observers also said the yuan’s exchange rate is essentially decided by China’s economic fundamentals, which currently do not warrant a weaker yuan.

As China consistently allows the market to decide the exchange rates, the International Monetary Fund declared the yuan as no longer undervalued in 2015.

Under the Obama administration, the Treasury also dropped its previous assessment that the yuan was “significantly undervalued.”


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