HONG KONG—Donald Trump accused China of devaluing its currency in the opening minutes of the first U.S. presidential debate—adding fresh spice to an old debate: Does China gain an unfair trade advantage by manipulating the yuan?

Mr. Trump's accusation—he has previously called China "the single greatest currency manipulator that's ever been on this planet"—may have rung truer a decade or so ago. This year, though, China has been intervening more to prop up its currency, analysts and economists say, rather than driving it lower to win an even greater share of world trade.

The Republican nominee isn't alone among leading U.S. politicians in criticizing China's perceived policy of keeping its currency undervalued to make its exports more competitive. That, according to most economists, is the definition of a currency manipulator.

The issue, though, remains far from simple.

Manipulationâ "or just a tight rein?

China's central bank does keep close control of the yuan. It sets the currency's value against the greenback daily, with reference to where it ended the previous day and movements of major currencies, allowing it to trade 2% higher or lower than this so-called fix.

Despite dropping sharply in early 2016, the yuan is down just 2.6% against the dollar this year. China's central bank is worried a bigger drop would encourage more Chinese people to send money abroad, weakening the currency further.

It has sold some of its foreign-currency holdings and bought yuan to prop up its value—contributing to a 10.5% drop in China's foreign-exchange reserves in the year to August.

"There's no way someone could charge [China] with manipulation right now," says Fred Bergsten, founding director of the Peterson Institute for International Economics.

The U.S. Treasury agrees, arguing in April that China's sales of foreign currency showed it isn't manipulating its currency downward now. Trump campaign spokeswoman Hope Hicks declined to comment.

Still, Mr. Bergsten says China was guilty of currency manipulation "big time" in the past.

The central bank held the yuan steady against the dollar for about a decade up to mid-2005, a period when China's economy expanded rapidly. Even after China scrapped the yuan's dollar peg, many felt it gained too slowly: It rose 21% from 2005 to 2008, while China's trade surplus in goods nearly tripled.

"They did have a very adverse effect on the U.S. economy, and on the economies of most of their trading partners, basically by cheating," said Mr. Bergsten.

Does China still get a trade advantage?

China's critics say its currency policy has helped it become the world's leading exporter of goods with a 13.8% market share, up from 5% in 2002, its first full year as a member of the World Trade Organization. Its goods trade surplus hit a record $567 billion in 2015. The U.S.'s trade deficit with China alone has more than tripled since 2002 to $367.2 billion.

Still, whatever advantage China has gained may be fading.

China has a large surplus in its current account, a broad measure of an economy's international finance position heavily influenced by trade. Yet that surplus is now equivalent to around 3% of China's gross domestic product, down from its 2007 peak of 10%, according to the World Bank.

Nor is the link between currency values and trade mechanical. The U.S.'s goods trade deficit with China has widened almost every year since 1985, regardless of the yuan's value.

A weaker yuan isn't an undiluted advantage for manufacturers in China, as goods assembled there often include parts from other countries. For example, Foxconn Technology Group runs the main site for Apple Inc.'s iPhone production in China. The screen is supplied by companies including Japan Display Inc., while Taiwan's Largan Precision Co. makes camera modules often used in the smartphone.

"We have really intricate supply chains in Asia," said Frederic Neumann, co-head of Asian economic research at HSBC. That makes it more difficult to link a decline in a currency to an increase in trade competitiveness, he said.

And a weaker currency does little if overall demand is sluggish. Despite the yuan's fall this year, U.S. imports of goods from China totaled $251.7 billion in 2016 through July, down 6.5% from the same period a year ago, according to the U.S. Census Bureau.

Be careful what you wish for

Mr. Trump's campaign website says the yuan is "undervalued by anywhere from 15% to 40%" and that freer trade and floating exchange rates would help reduce the U.S. trade deficit with China.

Assessing any currency's fair value is tricky. Some economists look at a country's real effective exchange rate, a gauge of its exchange rates against several trading partners adjusted for inflation.

For China, that reading has fallen over the past year, but remains higher than both its five- and 10-year averages—suggesting the currency is currently overvalued, based on data from Bank for International Settlements.

The International Monetary Fund meanwhile said in July that the yuan was "broadly in line with fundamentals and desirable policies, although its assessment is subject to a high degree of uncertainty."

Even if China removed its controls over the yuan, it may not move in the direction U.S. politicians hope. China's cooling economy, capital outflows and the prospect of the U.S. Federal Reserve raising interest rates again could all push the yuan down further.

"You can argue that the Chinese government should have let the currency go down more, and instead they are not," said Chen Zhao, co-director of global macro research at Philadelphia-based Brandywine Global Investment Management, which manages $70 billion.

"So they are doing the U.S. a favor in that sense," he said.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com

 

(END) Dow Jones Newswires

September 26, 2016 23:15 ET (03:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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