China reins back the measures supporting the Yuan ..... Can accusations of "currency manipulation" be far behind ?

Monday 11th September 2017

China reins back the measures supporting the Yuan ..... Can accusations of "currency manipulation" be far behind ?

ref :- "China Is Striving to Contain Its Once-Diving, Now-Thriving Yuan" , Wall Street Journal , Markets

Now that's just plain silly ..... At the start of the year (Jan 3rd, to be precise), USD / CNY made a high print above 6.96  --  last week, it briefly traded below 6.45. That represents a strengthening in the Chinese Yuan / Renmimbi of something a little over 7.3% against the Dollar . How could anyone accuse the Chinese authorities of currency manipulation  --  artificially finessing your currency lower in order to gain an "unfair" competitive advantage  --  just because they have decided that it's time to withdraw some of the measures designed to have exactly the opposite effect on the currency ? 

With the moves to support the Yuan having been so successful, it would seem perfectly reasonable to phase them out once objectives had been achieved, right ? For some perhaps, but we'd bet dollars to doughnuts (should that be donuts ?) that those spoiling for a scrap with China on all matters to do with trade will waste no time in making the manipulation accusations if the downward trend in USD / CNY is reversed. And wouldn't you know it, the Dollar has jumped form CNY 6.48 to nearly 6.53 this morning.

Before his inauguration in January, the then President-elect Trump repeatedly said that the first thing he was going to do after Jan 20th was to officially brand China "a currency manipulator"  --  a move that theoretically can lead to official sanctions and tariffs against the offender. The truth is however, protectionist pledges that go down well on the campaign trail are often tough to implement once in office and it may even become undesirable to do so once other responsibilities and considerations are brought into the equation. For example, if you were wanting to encourage China to "do the right thing" as far as N. Korea is concerned, you might have a better chance of success if you're not in the process of kicking off a trade war with the Chinese at the same time. 

It's not as though this particular campaign promise is the only one that the President has so far failed to live up to. In fact, it has been the inability to enact legislation or even to come up with detailed plans on tax reform and infrastructure spending that has undermined the Dollar all year. The general depreciation of the US unit has helped to make accusations of Chinese manipulation redundant  --  it's a difficult argument to justify when the currency in question is appreciating rather than weakening,and Mr Trump has been able to let the issue slide and satisfy himself by addressing the lower profile and less incendiary matter of Intellectual Property.

Nobody in their right mind would argue that China hasn't been a currency manipulator in the past, but action could and probably should have been taken about that years ago  --  maybe as many as ten years ago. For some time now however, the truth is that China has actively (aggressively ?) pursued a policy of supporting the yuan, not weakening it. Above and beyond any desire to avoid accusations of manipulation, it has had  its own very solid reasons for doing so  --  most of which centred on the fear that a Yuan that depreciated too quickly would undermine confidence in the world's second biggest economy and provoke unwelcome capital outflows.

Now the time  --  and the value of USD / CNY  --  has come when Beijing feels it is right to lift some of the measures it previously put in place to support its currency. Plainly their view is that a balance has been reached, and any further appreciation risks damaging exports and growth. So .....

It is scrapping the measure that made betting against the Yuan  more expensive by ending an extra deposit requirement placed on traders shorting Yuan against the Dollar on forward foreign exchange markets ......

It is removing the reserve requirement on foreign banks' Yuan deposits, releasing more Yuan funds into the "offshore" Yuan market in Hong Kong and making it easier for foreign investors to bet against the Yuan .....

It is also highly likely to phase out (by the end of the month) measures to curb China's outbound investment that effectively slapped a ban on the foreign investment strategies of Chinese corporates.

We should also remember that China has burned through $1 trillion in foreign-exchange reserves over recent years in supporting it's currency, so the picture of China as Currency Manipulator has been looking even more flawed. But does the rolling back of the support mechanisms and a possible winding down of intervention in foreign exchange markets by the People's Bank of China (PBOC) signify a return to China's old ways ?

It's far, far too early to say that ..... especially with USD / CNY still down around 6.50.  The test will be if there is an extended depreciation of the Chinese currency after the withdrawal of Yuan-supportive measures, and what the PBOC do about it if it occurs. President Trump is nothing if not unpredictable, but in the current circumstances even he might hang fire for a bit until he sees how things pan out  --  though admittedly his timing of a threat of a trade war with S. Korea was not a great precedent, to say the least.

What is in little doubt however is that Steve Bannon will see this as further evidence of the great Chinese conspiracy. You remember Mr Bannon ...... former White House chief strategist, de facto standard-bearer of the alt-right agenda and avowed advocate of all-out trade war with China. Many good judges felt that in leaving the administration and going back to head up Brietbart News, Mr Bannon would be more influential rather than less, and that his sphere of influence could still include the Oval Office itself. One suspects that we'll find out just how true that is if USD / CNY stages any significant rally.