The US is officially accusing China of currency manipulation after the US Treasury announced a sharp fall in the value of the Chinese yuan against the dollar.
The Chinese yuan drop caught markets off-guard as Beijing usually supports the currency.
Last week, China pledged to retaliate after President Donald Trump vowed to impose 10% tariffs on $300 billion of Chinese imports.
On August 5, the yuan passed the seven-per-dollar level for the first time since 2008, prompting President Trump to accuse China on Twitter of manipulating its currency.
He tweeted: “Based on the historic currency manipulation by China, it is now even more obvious to everyone that Americans are not paying for the Tariffs – they are being paid for compliments of China, and the U.S. is taking in tens of Billions of Dollars! China has always….
“China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
The US Treasury department defines currency manipulation as when countries deliberately influence the exchange rate between their currency and the US dollar to gain “unfair competitive advantage in international trade”.
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies.
On August 5, the People’s Bank of China (PBOC) said the slump in the yuan was driven by “unilateralism and trade protectionism measures and the imposition of tariff increases on China”.
The US government said Treasury Secretary Steven Mnuchin will now engage with the IMF “to eliminate the unfair competitive advantage created by China’s latest actions”.
The move is largely symbolic because the US is already engaged in trade discussions with China and has implemented tariffs on the country’s imports.
However, it fulfills a presidential campaign promise by President Trump who pledged to name China a currency manipulator on his first day in office.
The decision rattled investors, with Wall Street’s main stock market indexes recording their worst trading day for 2019. Asia markets extended losses on August 6, with the Shanghai Composite down 1.3% in afternoon trading.
China’s currency, the yuan, will join the IMF’s group of international basket of reserve currencies, the Fund is expected to announce on November 30.
Just the US dollar, the euro, Japan’s yen and the British pound are currently part of this select band.
Earlier this month, IMF Managing Director Christine Lagarde backed the yuan’s inclusion.
If the decision is made, the yuan is likely to join in 2016, experts said.
China is the world’s second largest economy behind the US and asked for the yuan to become a reserve currency in 2014.
Reserve currencies are used by central banks and other financial organizations to help pay down international debt and steady exchange rates.
The last change made to the basket was in 2000, when the euro replaced the German mark and the franc.
If Beijing’s wish is granted on November 30, some analysts have suggest that by 2030 the yuan will become one of the top three major international currencies, together with the dollar and the euro.
Concerns about Beijing keeping the yuan artificially low to help exporters is one reason the currency has previously failed to meet the criteria for reserve currencies set out by the International Monetary Fund.
However, Chinese officials have a made a concerted effort to build support for the yuan’s inclusion, and a recent IMF staff report endorsed such a move.
Initially, the yuan’s inclusion would be largely a symbolic gesture, some analysts have said.
They have also said the yuan’s ongoing inclusion in the basket would depend on whether China continues its financial reforms.