- The US Treasury will request bilateral talks to reassess the currency exchange rates of the two countries and may impose punitive measures.
- The US believes that China's depreciation of the renminbi is designed to promote exports and offset the impact of tariffs.
- China’s “breaking 7” in the RMB exchange rate was a response to the US threat of imposing a 10% tariff on $300 billion of Chinese exports to the United States.
Shortly after the Chinese yuan’s exchange rate against the US dollar fell “breaking seven,” US Treasury Secretary Steven Mnuchin issued a statement saying that the US government determined that China is manipulating the RMB exchange rate. This is the first time in 25 years that the United States has listed China as a currency manipulator.
The U.S. Treasury Department said that the statement issued by the People’s Bank of China on Monday is equivalent to publicly admitting that they manipulate the exchange rate and that they are prepared to continue this operation. The U.S. Treasury Department also accused China of violating the G20 summit’s commitment to avoid competitive devaluation. However, China’s central bank governor Yi Gang subsequently said that although the RMB exchange rate has fluctuated due to recent external uncertainties, “I am full of confidence that the RMB will continue to be a strong currency.”
After judging a country’s manipulation of the exchange rate, the US Treasury will request bilateral talks to reassess the currency exchange rates of the two countries and may impose punitive measures.
Since Trump’s decision to impose tariffs on almost all of China’s exports to the United States, the US-China trade war has rekindled. The US believes that China’s depreciation of the renminbi is designed to promote exports and offset the impact of tariffs. The US Treasury Department listed Taiwan and South Korea as currency manipulators in 1988. The last time China was listed by the United States as a currency manipulator occurred in 1994.
China’s “breaking 7” in the RMB exchange rate was a response to the US threat of imposing a 10% tariff on $300 billion of Chinese exports to the United States. The US stock market Dow Jones index fell 700 points on the 5th, losing nearly 3%.
Since the beginning of the trade war, the renminbi has been under downward pressure, but the Chinese government has been slowing down the depreciation rate, and this time it has finally broken the important psychological barrier of 7 yuan to 1 dollar, which symbolizes a key change in China’s official policy– preparation for a trade war. The People’s Bank of China held a press conference immediately afterward, which also revealed that it had long been expected to “break 7” and has obtained approval from the leadership.
It cannot be ignored that the depreciation of the renminbi is a double-edged sword. The Economist Intelligence Unit analysis pointed out that currency devaluation can boost exports and help reduce the impact of tariff increases on Chinese exports; on the other hand, once the currency devaluation is poorly controlled, the consequences are unimaginable. It may lead to a large outflow of capital, damage to market information, and increase the financial risk to the real estate industry.
The Chinese official media emphasized that renminbi break 7 is a “normal fluctuation.” Financial experts quoted a person in charge of the People’s Bank of China as saying that the RMB exchange rate breaking 7 is not an irreversible process like age growth and the destruction of dykes, but it can rise or fall. “7 is more like the water level of the reservoir. It is higher during the wet season. When it reaches the dry season, it will fall down again. It is normal.”
During the subprime mortgage crisis in 2008, the renminbi appreciated sharply, and the exchange rate of the US dollar against the renminbi fell from 7.8 all the way to 6.8. In order to stabilize the RMB exchange rate and peg the US dollar, the central bank stabilized the RMB exchange rate at 6.8-6.89. In 2016, the RMB faced depreciation pressure, and the central parity of the US dollar against the RMB reached 6.96. The central bank used a large amount of foreign exchange to stop the exchange rate at 7 yuan. prior to.
Since then, the market has formed a psychological expectation for “guarantee seven” and believed that the central bank would use policy measures to make sure the exchange rate didn’t fall below this figure. Because once this breakthrough is reached, investors may expect further future depreciation of the renminbi, which could accelerate withdrawal of foreign capital and greatly increase the difficulty of stabilizing the exchange rate.