Yu Yongding (Photo: IC)
The US Treasury surprised the markets with its designation of China as a "currency manipulator" on Monday, after the yuan breached the 7 mark against the greenback for the first in more than a decade. In an exclusive interview with Global Times (GT) reporter Li Tianyang following the US' capricious move, Yu Yongding, an academician and senior fellow of the Chinese Academy of Social Sciences, shared his input on the accusation of manipulation.
GT: The US suddenly announced the designation of China as a "currency manipulator." What's the nature of the announcement?
Yu: First, the US Treasury bases its determination of whether its trading partners engage in currency manipulation on three criteria: persistent, one-sided intervention in foreign exchange markets, significant bilateral trade surplus with the US, and material current account surplus.
China only meets the trade surplus criterion and doesn't fit into the other two criteria. The US, per its own rules, shouldn't have designated China as a "currency manipulator."
Second, the yuan's larger than usual swing against the US dollar merely happened within a single day. Internationally speaking, fluctuation of such magnitude is nothing unusual. Moreover, the yuan might swing back to its previous level some day. It's sheer nonsense that the US accused us of being a "currency manipulator," as the yuan moved just a bit. If this amounts to "manipulation," then the entire world is supposedly "manipulating" currencies. The Turkish lira once devalued about 46 percent in the first eight months of 2018. The currencies of Latin American countries have also experienced big moves both ways. The Japanese yen and South Korean won have also gone through fluctuations that were much wilder than the yuan's fluctuations. It's utter nonsense to suggest a currency is being "manipulated" if it fluctuates only for a short period of time.
Third, between 2015 and 2016, China's central bank used $1 trillion in foreign exchange reserves, an astronomical figure, to maintain the value of the yuan when the currency was under depreciation pressure, but the US didn't call China a "currency manipulator" then, as it thought the Chinese central bank's intervention (or "manipulation" in the words of the US) complied with its own interests. Now, when the yuan is devalued and China's central bank failed to intervene to prop up the yuan exchange rate, the US government accused China of "currency manipulation." In fact, the devaluation was caused by rising market pessimism, which in turn is likely a result of US President Donald Trump's threat of imposing additional 10 percent tariffs on $300 billion worth of Chinese exports. It's clear that the US administration's designation of a country being a "currency manipulator" is completely opportunistic.
GT: What are the implications of the currency manipulation designation for China, would it generate panic?
Yu: The US designating China as a "currency manipulator" means the trade war has escalated into a currency war and will escalate into a financial war. An all-out economic clash between the world's two largest economies will inevitably deal a huge blow to the already-fragile world economy.
But I think there's no need to panic. As the US has already labeled China a "currency manipulator," what would be its next move? According to the Treasury's arrangement, the US would impose additional punitive tariffs on China for "currency manipulation." However, the US has already imposed 25 percent additional tariffs on $250 billion worth of Chinese goods and threatened to impose an additional 10 percent tariff on all the remaining $300 billion in Chinese imports. Now that after having named China a "currency manipulator," how much more tariffs does the US want to impose on Chinese goods? To raise the 10 percent on $300 billion worth of Chinese products to 25 percent? To impose additional 45 percent tariffs on all Chinese products and eventually terminate China-US trade ties? It's hard to imagine after designating China as a "currency manipulator," what else the US could do in the tariffs arena.
The US' China tariff policy is subject to its China trade policy at large, and whether or not the US labels China as a "currency manipulator" is believed to not have a material impact on its China tariff policy. In other words, whether or not the US would escalate the tariffs war is not contingent upon the currency issue, which is merely an excuse. Apart from the imposition of additional punitive tariffs, the US might put constraints on Chinese investment. Be that as it may, the next moves the US government might consider will go beyond the currency sphere. On the part of China, it's fairly difficult to predict what Trump's next moves would be. So, what's the use of feeling panicked?
GT: Is there a chance of the trade war between China and the US being scaled up into a financial war?
Yu: The China-US financial war had already begun long before. Back in 2012, the US Treasury sanctioned the Bank of Kunlun over oil businesses with Iran. The point is that most of the Trump administration's practices are often irrational. For instance, the threat of additional 10 percent tariffs on $300 billion in Chinese products came unexpectedly. The tariffs threat, if it goes into effect, would deal a direct below to US consumers. No government on the planet in its right mind would have made the move, but the US government did it.
Previously, we still tried to figure out how the China-US trade friction would evolve. However, experience in the past one and a half years taught China that the Trump administration is capable of making senseless, unreasonable moves. Hence, anything can happen in the future. What would be the worst-case scenario? Sequestration of China's dollar assets. Certainly, it has yet to get to that point. But if the US holds true to its course, we would have to worry about worse coming to worst.
To launch a financial war against China would surely hurt the US economy and damage the credibility of the dollar. But many of the US' policies have proven that President Trump doesn't care whether a policy will hurt the American economy or not, as long as it can hurt rivals. At this moment, we can't rule out anything. Nonetheless, we cannot take the initiative to make a sally. We should instead try our best to maintain the various existing ties with the US. China should not in a hurry to take action in retaliation.
Under current circumstances, it's of extreme significance to ramp up domestic economic restructuring, rely more on domestic demand and focus more on financial security. Imagine what it would be like now if we had fully opened up the capital account?
We have to prepare for the worst in order to strive for the best. Most importantly, China should work to stabilize economic growth, prevent the economic growth rate from continuing a downward trend, and not loosen varied reform measures. We wouldn't worry about the US as long as our economy, notably the real economy and financial economy, gains strength. But if we fail to do our "homework," we would be hit by a precarious encounter.
I believe that China, as a major power, is capable of handling all contingencies.