Is China intentionally lowering the value of its currency in an effort to reduce the price of its exports, in effect undercutting US tariffs? The US Treasury Department thinks so.
Following years of scrutiny of the country’s interventions in the foreign exchange market, Treasury secretary Steven Mnuchin took official action August 5, designating China as a “currency manipulator.”
With the aggressive tack taken by the US in calling out China, even though it wasn’t clear that it met the criteria for manipulator status, it seems natural to question which other countries on the Treasury’s radar could be next. From the most recent report submitted to Congress, the biggest risk seems to lie in other Asian economies—in particular Korea, Taiwan, Malaysia, Vietnam, and India. All have attracted the notice of the US government lately.
Yet it seems no country is off limits if it runs a trade surplus with the US and has a history of currency intervention to limit appreciation or devalue its currency versus the dollar. This is especially the case if the country also runs a large foreign exchange reserves balance that it could deploy to strengthen its currency during periods of excessive weakness.
This could prove troublesome as global growth begins to decelerate and countries look to their monetary tool kits to support their economies. Notably, the go-to move of lowering short-term interest rates to boost or stabilize growth may get tossed out the window, lest this tactic put the country directly in the sights of the US if the move weakens its currency versus the dollar. Fearful of being added to the “currency manipulator” list, many countries may have to look to other forms of stimulus for support, with the likely outcome that we see more uncertainty and less transparency around government actions in the emerging markets.
The bottom line
Though many see naming China a currency manipulator as long overdue, the sudden shift in opinion by the Treasury shows how quickly things can change in the emerging markets—and adds a great deal of uncertainty to the markets going forward. With many countries, particularly in Asia, running trade surpluses with the US and practicing some degree of currency intervention, it’s possible more of these cases may come up in the future. At the very least, with the slowdown in global growth well underway, China’s new label as a currency manipulator may make many countries more hesitant to employ tried-and-true monetary measures to restart their engines. It’s a situation that may lead to less transparency going forward—and more spikes in volatility.