China’s central bank flatly rejected the charge from the United States that it is a currency manipulator, instead accusing Washington of adopting protectionist, unilateral actions which run counter to international rules and negatively affect the global economy.
The US quickly labelled China after the yuan fell below the key threshold of 7 to the US dollar on Monday, a level the PBOC had previously defended. It was the first time it had fallen below the psychologically important level since 2008.
This added a currency war element to the existing bilateral trade and technology conflicts.
“China employs a managed floating exchange rate system that is based on market supply and demand and in reference to a basket of currencies. There is no such thing as currency manipulation [on the part of China],” the People’s Bank of China (PBOC) said in an statement on Tuesday.
“China has refused to engage in a competitive devaluation despite the US escalating trade tensions from 2018, nor has it used [the exchange rate] as a tool to address [the trade conflict].”
The move to allow the yuan to depreciate was justified by economic fundamentals and market sentiment, but analysts said that the decision by the PBOC not to defend the key threshold gave the Trump administration the perfect excuse to extend the bilateral dispute.
“China had no intention to escalate trade tensions and particularly didn’t want it to spill over into the finance and investment areas,” said Yu Miaojie, a professor at Peking University’s national school of development.
Yu argued that the depreciation was not deliberate, but rather a result of “market panic” triggered by last week’s threat by US President Donald Trump to levy a new 10 per cent tariff on the US$300 billion Chinese merchandise.
“In some sense, the PBOC didn’t want this depreciation. There’s a possibility that it will take measures to stabilise the exchange rate in the short term,” he added.
China announced on Tuesday that it would sell 30 billion yuan (US$4.3 billion) worth of short-term securities in the Hong Kong market next week, a move that will absorb yuan liquidity and support the value of the Chinese currency.
The US Treasury’s statement on Monday announcing the designation of China as a currency manipulator cited some paragraphs from the PBOC’s own statement on Monday in an attempt to prove that “China has taken concrete steps to devalue its currency”.
“In a statement today, the People’s Bank of China noted that it ‘has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behaviour that may occur in the foreign exchange market.’ This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis,” said the US Treasury.