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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