China Research

Tillspetsningen i USA/Kina-konflikten allt annat än oväntat

Sammanfattning / Summary in Swedish

Handelskonflikten mellan USA och Kina präglades av en rejäl tillspetsning under de senaste veckorna. Utvecklingen fick dessutom en ytterligare påspädning genom en något hastig försvagning av den kinesiska valutan yuan – en försvagning som USA:s politiska ledning kallade ”valutamanipulation”.

För egen del vill jag inte gå lika långt med mitt ordval. Hade yuanens växelkurs varit fritt flytande – och inte som i verkligheten flytande med uppenbara dagliga gränser – hade den istället högst sannolikt blivit ännu svagare under det gångna året. Överhuvudtaget ter det sig omöjligt att se president Trumps tre ekonomiska målsättningar och önskemål fungera på samma gång: ännu lägre räntor, god tillväxt och likväl en svagare dollar.

De senaste två veckorna har med all önskad tydlighet visat att USA/Kina-konflikten ej kan analyseras utan psykologiska, politiska och sociala infallsvinklar – https://blogg.lnu.se/china-research/?cat=13398 från den 3 juni.

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Readers of this blog may remember my previous skepticism about positive trade negotiations between the U.S. and China any time soon – unlike many other analysts did ahead of G20 summits and similar events. My doubts about a deal were – and still are – mainly based on the deep psychological divergence between the American president and the Chinese political leadership https://blogg.lnu.se/china-research/?cat=13398 from June 3. President Trump thinks that he has prerogative to interpret global developments in line with what he defines as “America first”; whereas the Chinese look at their history and development with obvious pride and dislike therefore all kind of humiliation from the other side of the Pacific.

One can be pretty sure that the Chinese have felt strongly humiliated in recent quarters. Since the American president does not like the Chinese (politicians), space for fruitful negotiations was very limited already from the beginning of the trade tensions more than one year ago – and has become even more limited in the past few weeks. This development was no surprise and does not bode well for decreasing tensions between the two global superpowers any time soon.

Is China really a currency manipulator?

In the beginning of August 2019, American Secretary of Finance Steven Mnuchin very angrily called China a “currency manipulator”. This was a kind of spontaneous comment since U.S. law also requires that three assumptions for such an unpleasant classification have to be met, certainly after careful analysis (see the illuminating information by the United States Government Accountability Office, GAO, https://www.gao.gov/new.items/d05351.pdf, find different access). However, this was obviously not the case in the beginning of August – but still in the Treasury’s evaluation from May 2019. Then, the conclusion from the analysis was that no important trading partner of the United States more recently had violated the three – by law – defined fairness indicators for exports to the United States (see the source below). However, China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam had failed more recently in two developments of the three trade- and currency-related indicators. For this reason, the above-mentioned countries are currently set on the Treasury’s so-called Monitoring List. Sweden still is not there – but probably not far away. https://home.treasury.gov/system/files/206/2019-05-28-May-2019-FX-Report.pdf (find different access).

Making a more general comment, each and every country is, in principle, free of choosing its exchange rate policy, China certainly as well. However, being listed by the United States as a currency manipulator may have serious consequences for China directly and for the global economy more indirectly. But it should be repeated that real market forces most probably would have given a weaker development of the yuan vis-à-vis the USD in recent quarters – because of China’s weakening growth and lagging reform activities.

In other words: In my view, China currently does not meet all the necessary criteria for being a currency manipulator – right in line with the conclusions of the Treasury only three months ago. However, when asking China for global currency responsibility, the same request could be sent to President Trump regarding American responsibility for global trade – preferably with China to follow with good energy to create more transparency and willingness to reform, giving this way benefit to both the Chinese and the global economy, the American certainly included.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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Kinas lätt stigande valutareserv saknar ekonomisk relevans

Sammanfattning på svenska / Summary in Swedish                                

Kinas i maj lätt stigande valutareserv fick nyligen överdriven uppmärksamhet i en del analyser. Bytesbalansen är viktigare.

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In the middle of June, one could read that China’s currency reserves “surprisingly” had risen from billion USD 3095 billion in April this year to USD 3101 billion one month later – compared to market expectations at 3090 billion.

What caught my attention was not so much this little rise as such but the used description of “surprisingly” – and also the still ongoing publication of market expectations. Hereby, a feeling may be given to readers and appliers of this statistical indicator that forex reserves can be predicted with good accuracy.

However, this is by no means continuously the case. First, USD 5 or 11 billion is a very small amount related to more than 3000 billion of total currency reserves. Second, most central banks easily have the opportunity to influence their forex reserves in the shorter run by so-called forward agreements – an instrument which the Swedish Riksbank applied, for example, quite ambitiously some thirty years ago when the Swedish crown was burdened by both high deficits in public budget deficits and in the current account.

Consequently, the recent limited rise of China’s currency reserves does not necessarily reflect free market developments. Markets are usually neither informed on this issue by a central bank nor on the composition of the currency reserve. More interesting, however, is the fact that China lost close to USD 1000 billion of its currency reserves in the past five years, partly reflecting the strongly shrinking or even more or less eliminated surplus in the current account.

Unfortunately, financial markets still neglect the analysis of China’s current account. This may even turn out to be a malign neglect at some point in the future (see also my article on this issue in: chinaresearch.se from May 15 this year).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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