Throughout his presidential campaign, Donald Trump promised to name China a currency manipulator as soon as he got the chance.
While he hasn't done that yet, he also hasn't let go of his claim that China is suppressing the value of its currency to make its exports more competitive. Last month, he said the country is a "grand champion" at manipulating its currency.
For most of the past year, the evidence didn't support Trump's claims.
The yuan fell, but that was because Chinese businesses and investors were moving capital out of the country. If China intervened, it was to keep the currency from falling too fast. A big clue about this was that China's foreign-exchange reserves tumbled. They fell for eight straight months.
That just changed.
Data published by the People's Bank of China on Tuesday showed that the country's FX reserves rose by $6.92 billion, to $3.01 trillion, during February — the first increase since June. Economists surveyed by Bloomberg were expecting that number to fall by $2.97 billion, on average.
"Our model suggests that valuation effects from fluctuations in exchange rates and bond prices should, if anything, have reduced the value of the reserves," Capital Economics economists Julian Evans-Pritchard and Mark Williams wrote in a note to clients after the data was released. "At face value, then, it appears that the People's Bank (PBOC) purchased rather than sold foreign exchange last month for the first time since October 2015." (Emphasis is ours.)
According to Evans-Pritchard and Williams, this marks a "striking shift" and suggests that "the charge that China has been intervening to weaken its currency may be justified," at least for the month of February. They said they believe Tuesday's data could "create tensions with the Trump administration."
The Treasury's Currency Report — and an opportunity to slap the "currency manipulator" label on China — is due next month. The tag isn't immediately punitive; the US would have to spend some time negotiating with China over the issue before it would impose low-level sanctions against the country. The last time China had the label was from 1992 to 1994.
In order for that to happen, three conditions must be met, according to the Treasury:The country must have a significant bilateral trade surplus with the US. (China had a $347 billion trade surplus with the US in 2016.) The country has a "material" currency account surplus. (For the first nine months of 2016, China's account surplus was $172.7 billion.) The country is engaged in persistent one-sided intervention in the foreign-exchange market.
While the first two conditions have arguably been met, the third is iffy. Even if this is the beginning of a trend, one month of data is hardly enough to make the case that China is engaging in persistent one-sided intervention.
But the Trump administration might not be stopped by that last argument, or by what existing US laws say about what it can do with the label.
Deutsche Bank's economists wrote about the issue last month and speculated that the "currency manipulator" tag could come soon.
"This has been a consistent campaign promise, and he has demonstrated since taking office his determination to deliver on his promises, however controversial," they wrote. "Existing US law and its application by the Treasury in recent years are unlikely to satisfy the president's desire for strong penalties for unfair trade, so we anticipate that the proposed measures could go far beyond what has thought possible even a few weeks ago."