US Lifts Currency Manipulator Tag Off China; Switzerland added to the Watch List

The US Treasury Department published semi-annual Report on ‘Macroeconomic and Foreign Exchange Policies of 20 Major Trading Partners of the United States’ on 13 January 2020, providing a review of their currency practices. The Treasury Report also added Switzerland to the watch list in addition to Germany, South Korea, Japan, Italy, Ireland, Malaysia, Singapore and Vietnam.

Switzerland, in particular, has experienced a large and increasing trade surplus with the US. The Swiss Nation has been intervening repeatedly in the foreign-exchange markets in the past couple of years to trigger the “manipulator” label.

Thus, the Treasury suggested that Switzerland should rather switch to utilising its fiscal policy to support its domestic economy and frequently publish data about its currency interventions.

Beijing’s currency manipulator designation had been the key reason behind the technology and trade dispute between the world’s two most powerful economies that began in 2018 and escalated through entire 2019 creating a wave of economic and financial uncertainty across the globe.

The US Treasury Secretary Steven Mnuchin informed that China has also stated some enforceable commitments on its management of the yuan and agreed to not competitively devalue it to gain an unfair advantage in trade.

Beijing has also announced that it would share information about how it sets its exchange rate and reform rules to keep the yuan at a reasonable and balanced level.

While China exerted strict control over its currency and had certainly been depreciating it through the course of the trade war, in recent months, however, the yuan has begun strengthening again as the two countries negotiated to reach a mutually beneficial deal.

According to some experts, China has not been manipulating its currency to benefit its exports. As per an international law, labelling a country as currency manipulator requires due diligence and negotiation for a year before retaliating.

Over the past few years, the global influence of Chinese economy as well as its official money Yuan has increased unprecedently, especially on the economies linked to it.

The recent addition of Chinese Yuan to International Monetary Fund’s (IMF) basket of Official Foreign Exchange Reserve (COFER) currencies is a testimony to its growing global prominence and credibility. With that, Yuan joined the league of US dollar, Euro, and Pound Sterling.

Nevertheless, the phase one trade deal is going to come as a relief to American manufacturing companies and workers who had lost their economic livelihood because of their large imbalance with China.

China records Trade Surplus

A shift to the improving trade scenario in China and relations with the United States is clearly reflected in the recent data published by General Administration of Customs on 14 January 2020 reporting that that China’s exports increased by 5% while the imports increased by 1.6% during calendar year 2019.

The trade surplus amounted to CNY 2.92 trillion for the year.

For the last month of December 2019, exports and imports recorded an uptick of 9% and 17.7% year-on-year respectively, resulting in a trade surplus of CNY 330 billion.

The data suggest that China’s exports to France, Canada, Australia, Brazil and Southeast Asia recorded double-digit gains in 2019, demonstrating the resilience of Chinese exporters in directing their focus on other key markets of Asia, Europe and Africa as exports to the US contracted over the year.

It is particularly noteworthy as both businesses and stock markets have had to bear the burden of this trade war and improving trade figures represent improving market and business sentiments with the US-China trade negotiations heading forward on a positive.

China Stands Out With Robust Policy Initiatives

In terms of size and dynamism, the economy of China stands out among the emerging markets, and now the world’s second-largest economy which contributes maximally to world economic growth.

Moreover, China with its giant economy is aspiring to lay grounds and seeking support from relevant reforms and the essential political action, to create a world where Yuan will be of highest prominence.

One of Chinese government’s initiatives on these lines is the controversial global development strategy, Belt and Road Initiative started in 2013, involving infrastructure development and investment projects in 152 countries and international organizations in Asia, Africa, Europe, Middle East and the Americas, in addition to China offering incentives to the recipient countries to use the Yuan as an invoicing currency.

In 2018, Beijing had launched a contract in RMB (Renminbi)-termed oil futures that became quite popular to the extent of posing a threat to the US dollar with the former’s expanding volumes. The quest doesn’t end there.

The Chinese government also eases down the interest rates to zero, which in turn makes the Chinese bond market very attractive to foreign investors. However, there are some limitations with respect to China’s fixed-exchange rate regime and rigid capital account, that is, China controls its capital movements to retain control over its domestic economy. Thus, Yuan is not a freely convertible currency, which seems to be a hurdle for it to rise up as the global currency.

Good Read: How are Equity Markets Responding to the US-China Trade Developments

Disclaimer