China's currency manipulation-- war of words only?

In August 2019, the United States Department of Treasury slammed China with the label "currency manipulator" as a result of the sharp devaluation of the RMB (Chinese currency). Before delving further, we first answer the questions: what is currency manipulation and why does it matter?

Essentially, currency manipulation occurs when a country sells its own currency and buys foreign currency - commonly the U.S dollars - to lower its own currency's value and gain a competitive advantage. Although there are varying reasons why a government would practise this, the policy is mostly applied to increase the price of imports and subsidise exports. This certainly matters as the relative value of currencies plays a significant role when countries trade. The costs of its exports will relatively be lower when compared to imports of other countries. How is currency manipulation different from adopting a fixed exchange rate regime? The problem is that nobody really knows the answer. In accordance with a study published in Rice University's Baker Institute for Public Policy Issue Brief, till date, the only method to differentiate the two lies within the beliefs of its trading partners, whether the rate has been set too low or otherwise.

The devaluation of the Chinese currency, Renminbi (RMB), in 2015 through 2019 has been said to escalate trade wars and rattle the markets. From the perspective of the world economy, the Chinese currency is closely linked to the exporting countries and stockholders. In 2015, China recorded the slowest economic growth rate in 25 years. To boost its economy, China first devalued its currency. According to an article published by Investopedia, by devaluating the Chinese currency (RMB), China successfully boosted its exports due to the relatively lower price, thus gaining a competitive advantage.

Although China benefited, stockholders and governments of the rest of the world received the signal of currency war and were forced to quickly cope with the issue. Many Asian competitors and trading partners, including Malaysia, lowered their currencies to counter the devaluation of RMB as both the US and China have continued imposing tariffs against each other's products on more than $360bn and $110bn respectively, reported by BBC in 2020. As published in The Star Newspaper, written by Cecilia Kok in 2015 titled "How devaluation of Yuan affects other economies", Vietnam - one of the rival exporting countries - weakened its currency by widening the dong's trading band against the US dollar. Furthermore, as reported by New Delhi Television Limited (NDTV), written by Varun Sinha, the devaluation of the Chinese currency, that surged the demand of the US dollar around the world, led to increased volatility of Indian Rupee given that Indian currency fell to its lowest in two years - 64.95 rupees per dollar. To the extent that China and India are rival exporting countries that compete in export products such as textiles, metals and jewelry, the devaluation of the Chinese currency threatens Indian domestic exporters and lowered the margin of Indian exporters. This could lead to the dumping of Chinese goods into the Indian market, causing deterioration of domestic manufacturers.

The US stock market had also taken a strong hit during the trade war. One of the renowned newspapers "The New York Times" published an article in 2019 by Ana Swanson, Alexandra Stevenson, and Jeanna Smialek mentioning that the U.S. President Donald Trump vowed to impose 10 per cent tariff on $300bn of Chinese imports followed by allowing the RMB to devalue sharply, passing the seven-per-dollar level for the first time since 2008. According to the US Treasury, the devaluation "left the RMB at its weakest against the dollar in over 11 years". Due to China consistently devaluing its currency, the US Department of Treasury eventually released a report labeling China as a currency manipulator on August 5, 2019.

The New York Times opinion piece also mentioned that a great deal of US-sensitive stocks that are influenced by the technology sector such as Microsoft and Apple had seen a drop in their market of more than 3.4 per cent and 5.2 per cent respectively. This is due to the fact that one of their major technology manufacturers, which produces and supplies computer-chips, is actually situated in mainland China. Stocks of technology, consumer discretionary, and the industrial sector fell sharply as the US imposed an increase of tariffs on Chinese imported goods as a counter-measurement towards the devaluation of the RMB.

However, in January 2020, the US Treasury Department removed the currency manipulator label that was previously imposed on China. In the later report, the Treasury stated that China had made "enforceable commitments to refrain from competitive devaluation while promoting transparency and accountability." Although the RMB had depreciated as far as 7.18RMB per dollar back in September of 2019, it had appreciated a month later and strengthened to 6.93RMB per dollar as of the time of report earlier this year. According to an article by CNBC, China currently stays on the "monitoring list" for currency practices alongside others such as Japan and Germany.

Although China has benefited from the devaluation of its currency, the rest of the world experienced a drawback due to the massive reduction in exports and in the exchange market. A motive for manipulation could be the idea that trade is a zero-sum game, where when one wins, the other loses. However as mentioned by trade economist Douglas Irwin in his Foreign Affairs publication The Truth about Trade (2016), "Thinking of trade as a zero-sum game is dead wrong... Trade is actually a two-way street-the exchange of exports for imports-that makes efficient use of a country's resources to increase its material welfare. The United States sells to other countries the goods and services that it produces relatively efficiently and buys those goods and services that other countries produce relatively efficiently. In the aggregate, both sides benefit." To put it simply, an exchange rate will be a positive-sum game if both parties trade products they efficiently produce resulting in wins for both. 

In conclusion, although currency devaluation is a common method for countries to protect their economy, a devaluation of currency to large extents - in this case, the great devaluation of the Chinese currency - could be tricky and problematic. Since China is the largest exporter of the world, a minor change in the currency of such a large entity will certainly affect the macro economy of the world dramatically. It is, therefore, necessary that tight and applicable currency rules are included in trade agreements to go forward. This is in order to avoid any instances of currency manipulation that could hurt signatories and ensure trade where both countries enjoy a positive-sum game.

Celine Yeun and Nurul Athira Salith are undergraduate students at the School of Economics, University of Nottingham Malaysia. [email protected] and

[email protected] respectively