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COLBY SMITH: Welcome to Charts that Count.
This week, the US removed China's designation
as a currency manipulator.
The decision came just a few days
before the two superpowers signed a phase one trade
deal that put on pause any escalation in the trade
war for the time being.
So how did we get here?
In order to answer that, we have to rewind the clock
a few months back to the summer.
Now, here is a chart of the exchange rate between the US
dollar and China's currency, the renminbi.
The y-axis here is inverted because as $1 fetches
more renminbi, it means that the renminbi is weakening.
So as you can see in this chart going back to 2019,
the first significant down move in the renminbi
versus the dollar was in May.
Now, what sparked this was the US threatening tariffs
on China.
In August, the US made good on that threat.
The US slapped additional tariffs on China and China
retaliated.
And on August 5, everything came to a head.
The renminbi weakened considerably
against the US dollar, and it actually
crossed a very important threshold--
7 renminbi per dollar.
A few things about China's currency.
The first is that it is not free floating
like the dollar or the pound, which tend
to be driven by market forces.
Instead, China manages the value of its currency,
and that means the state steps in
to intervene in order to determine
a targeted range at which the renminbi fluctuates
versus other currencies.
It can do this in a few ways.
The first is that each day, the central bank
sets a reference rate around which the renminbi can trade.
The second way is that the central bank and China
can intervene in foreign exchange markets,
and either buy or sell dollars, depending
on where they want the value of the renminbi to go.
The second key point about the renminbi
is that this 7 renminbi level, that I mentioned earlier,
is very psychologically important in the country.
The last time citizens saw a currency weaken
past seven renminbi per dollar was
during the global financial crisis,
and officials have spent lots of time and lots of money
to ensure that hasn't happened since.
So when it did in August, it was an incredibly big deal,
not least because President Trump
had been complaining for a long, long time
that China was purposely weakening its currency to gain
an unfair trading advantage.
Later that day on August 5, the US
responded to the depreciation of China's currency
by naming China a currency manipulator.
This was surprising for a few reasons.
The first is that the US Treasury tends
to evaluate its trading partners and their currency
practises only twice a year.
So in April and October, the Treasury
puts out a report that talks about currency manipulation
and if the trading partners are doing it.
And they outline various criteria
for how to determine whether or not that is the case.
Some has to do with how much a country is intervening
in foreign exchange markets.
Others have to do with how much a country's importing
or exporting versus its peers.
If a country meets three of these criteria,
they are named a currency manipulator.
If they meet just two of their criteria,
they're put on a monitoring list.
China, in August, only met one of the criteria.
And even more importantly, currency strategists
were saying that China was actually
intervening to prop up the currency, meaning
to strengthen its value against the dollar,
not actually weakening it.
See, what was happening when this trade war was swirling
around was that there were growing concerns
that China's economy was slowing down.
And at the same time, the central bank
was pumping stimulus into the economy, which
has the impact in any economy, let alone
in China, of weakening a currency.
Taking this all together, any country facing these concerns
would have seen a depreciating currency, as well.
And you can see as some of these pressures
abated after the summer, the value of the renminbi
actually rises versus out of the dollar.
What was driving this was progress on the US-China trade
war front.
So both sides agreed to no new tariffs.
They sat down and agreed in December
to sign a phase one trade deal.
And the renminbi strengthened as this big looming risk
to its economy dissipated somewhat for the time being.
Now, here we are in early 2020, and the Treasury
has removed this label.
But currency strategists say that this whole saga
should spook the US's trading partners.
It seems as though anyone is at risk
at this point of being named a currency manipulator.