China's Trump Card

Chapter 4China–US Financial Decoupling

4.1 Trade War and the Yuan

Exchange rates have been a subject of debate in many trade disputes, and the China–US one is no exception. When the tension escalated in August 2019, the US Treasury labeled China as a currency manipulator. According to the official release, the US planned to engage with the International Monetary Fund (IMF) to eliminate the unfair competitive advantage created by China's latest actions.¹ In January 2020, the US revoked the decision a few days before the Phase One deal.² This back-and-forth decision on China's status by the Treasury was not new. China was designated a currency manipulator in 1992–1994. For many years, China has been frequently alleged to have kept the yuan undervalued.

Whether the yuan is overvalued or undervalued has long been subject to many debates in the financial market. The IMF assessment in recent years concluded that the yuan exchange rate was in line with fundamentals. After the exchange rate reform in 2015, the Chinese government has clearly allowed the spot rate to be more market-determined. However, economic slowdown and the trade war itself pressed the yuan weaker and the People's Bank of China (PBOC) was busy to prevent the yuan from depreciating. This policy intention should favor Trump's trade policy. Interestingly, the US administration did not seem to understand (or intentionally ignore) the reality.

Due to the trade war, the foreign exchange (FX) market sentiment flip-flopped ...