On August 6, the US Treasury department designated China as a currency manipulator, dealing a fresh blow to the world economy and global financial markets that are already grappling with multiple uncertainties. This move has not only violated international rules; it also contravened domestic law in the US. It is a worrying development.
Since the start of reform and opening-up, China has consistently and unswervingly pursued reform of the renminbi exchange rate regime. As a result, market supply and demand has played a decisive role in the pricing of the renminbi against other currencies.
Reforming the exchange rate regime has been an important part of the programme of market-based reforms designed to allow the market to play a decisive role in resource allocation in the Chinese economy. We in China recognise that although the short-term effect of currency manipulation is a subject of much debate, from a long-term perspective such behaviour violates the natural laws that govern the functioning of the market. We also know that it will always eventually invite punishment from the market.
China has stayed true to the spirit of the declarations of successive G20 summits in refraining from competitive devaluations and not targeting exchange rates for competitive purposes. In the 1997 Asian financial crisis, and the global financial crisis of 2008, China kept its commitment to maintain the stability of the renminbi exchange rate. This contributed to the stability of international financial markets and the global recovery.
In 2016, during China’s presidency of the G20, and with China’s lead, finance ministers and central bank governors agreed to “consult closely on exchange markets” and reaffirmed a commitment to “refrain from competitive devaluations” and “not [to] target our exchange rates for competitive purposes”. This was an exemplary instance of the G20 working together to promote policy in a co-ordinated way.
The escalation of trade tensions since 2018 has posed major challenges to the Chinese economy. However, China has refrained from competitive devaluations and has not used the renminbi as a way of dealing with the trade dispute and other external shocks.
We have made tremendous efforts to maintain international financial stability. To address downward pressure on the exchange rate, the People’s Bank of China has increased its communications with the media and market participants in an effort to keep the renminbi exchange rate basically stable. In 2018, the renminbi devalued only 4.8 per cent against the US dollar, and 1.7 per cent against a basket of currencies. Since early 2019, the renminbi weakened by just 2.01 per cent and 1.38 per cent against the dollar and a basket of currencies, respectively.
In an era of economic and financial integration, concerted collective effort is required to ensure market stability. Escalating trade tensions have inevitably put the renminbi under pressure. On several occasions, it fluctuated by large margins, each time following the US announcing additional tariffs on Chinese goods.
On August 1, the US announced a 10 per cent tariff on $300bn worth of Chinese goods. It was this unexpected external “manipulation” that exposed the renminbi to a sudden intensification of downward pressure. The subsequent fluctuation of its exchange rate was a market response to this stress. The use by the American administration of the label “currency manipulator” runs counter to basic economics and flouts an international consensus. It may also have a further impact on the renminbi.
The IMF provides authoritative assessments of exchange rates. Since 2015, it has concluded, after almost every one of its annual “Article IV” consultations with China, that the renminbi exchange rate was broadly in line with the economic fundamentals. China’s current account surplus as a percentage of gross domestic product was 0.4 per cent in 2018 — well within the internationally acknowledged acceptable range.
Even when measured against the criteria set by the US itself, China’s behaviour cannot be characterised as currency manipulation. Since 1994, the US Treasury has never charged China with currency manipulation in its semi-annual currency policy report.
The international community is currently in dire need of a stable economic and financial environment. Rather than resorting to protectionist measures, such as currency devaluation and tariff rises, countries should work together to promote economic growth and rebuild confidence of global markets.
The writer is deputy governor of the People’s Bank of China