China a manipulator? Trump says never mind


IT TOOK US President Donald Trump about two-and-a-half years to designate China a currency manipulator, thereby fulfilling one of his key campaign pledges — and only five months after that to effectively say “never mind”. Just like back in August, when the Treasury Department foisted the label on China in the heat of the escalating trade war, the decision by the US to reverse its stance should be viewed as more symbolic than meaningful for financial markets. But it’s something.

A tamping down of the rhetoric from both the US and China on the trade front as they worked toward a “Phase 1” accord helped to propel equities higher in recent months. So, it stands to reason that market participants will welcome any further moves seen as a de-escalation of the trade war. Indeed, stocks reached their highs of the day following the news, adding to gains of anywhere from 14% to 16% for the US, China and worldwide since early August.

The timing isn’t very surprising, with the two sides scheduled today to sign the first part of what is being touted as a multi-pronged deal.

Nobody knows the details yet, but the accord is expected to include vague commitments by China to “respect” American intellectual property, not manipulate its currency and step up purchases of some US farm goods.

In exchange, the US would reduce some tariffs on Chinese imports. And there doesn’t seem to be any real goals for phase two other than US officials saying future talks will focus on broad topics such as digital trade, data localisation, cross-border data flows and cyber intrusions. Many investors and strategists have said they see little appetite on the part of Trump to risk causing the stock market to tank by taking a hard line with China in an election year.

In some ways, the move by the US to no longer designate China a currency manipulator can be seen as righting a wrong. After all, China didn’t meet the US Treasury’s own criteria for currency manipulation when the designation came in August. In fact, it was actively trying to keep its currency from becoming too weak as the trade war heated up. The International Monetary Fund even said in September that China’s yuan was fairly valued and there was no evidence of manipulation.

Not that designating a country a currency manipulator has any real teeth. China could be excluded from US government procurement contracts, but only if the US finds insufficient progress by the Asian country to stop manipulating its currency a year after the designation.

And as Bloomberg News noted, one potential penalty — cutting off new assistance from the Overseas Private Investment Corp, a US government agency that helps development projects — had already been in effect since 1990 at the time of the August designation.

At the end of the day, the main thing the US got out of designating China a currency manipulator was raising uncertainty among companies.

The World Bank last week cut its 2019 global GDP growth estimate to 2.4%, but said its forecast of 2.5% growth this year could be even stronger if recent policy actions, “particularly those that have mitigated trade tensions”, lead to a sustained reduction in uncertainty.

The growth in world trade volume, the World Bank added, could climb from a post-crisis low of 1.4% last year to 1.9% this year and 2.5% in 2021. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.