President-elect Donald Trump said Friday he will not label China a currency manipulator on his first day in office.
Trump said shortly after his election that he would instruct the Department of the Treasury to label China a currency manipulator on day one.
“The U.S. Treasury’s designation of China as a currency manipulator will force China to the negotiating table and open the door to a fair — and a far better — trading relationship,” he argued.
Trump revealed Friday that he would “talk to them first” before taking any action against China.
“Certainly they are manipulators. But I’m not looking to do that,” he said during an interview with the Wall Street Journal. While walking back some of his earlier statements, he held fast to his criticisms of Chinese practices.
“Instead of saying, ‘We’re devaluating our currency,’ they say, ‘Oh, our currency is dropping,'” Trump told reporters, “It’s not dropping. They are doing it on purpose.”
“Our companies can’t compete with them now because our currency is strong and it’s killing us,” he added.
Trump has repeatedly lashed out at China for its currency management practices. He believes the country is intentionally devaluing its currency against the U.S. dollar, making Chinese exports to the U.S. cheaper and American products in China more expensive.
China does appear to be manipulating its currency, but in the complete opposite direction.
China intentionally manipulated its currency for years, purchasing foreign currencies, U.S. dollars in particular, to artificially devalue the Chinese yuan to give it an advantage. China amassed huge foreign exchange reserves in the process.
For this reason, the U.S. Department of the Treasury labeled China a currency manipulator in the 1990s.
As China’s economy grew stronger, it allowed its currency to appreciate to a certain extent.
But, China’s growth is slowing. Companies are investing overseas, capital is leaving the country, and the Chinese yuan is plummeting to record lows as the dollar rises.
Evidence suggests that China is now draining its foreign exchange reserves to purchase more yuan in a desperate attempt to keep its currency from sliding further. The country’s vast foreign exchange reserves dropped by about $280 billion in 2016.
China has also been placing restrictions on foreign purchases and investments and attempting to rein in capital flight.
If China were to take its hands off the wheel, the yuan might actually fall even faster, creating a situation in which Chinese exports have a greater competitive advantage over U.S. products.
That Trump has decided to pump the brakes on labeling China a currency manipulator may ultimately be for the better. The change may represent a shift towards a more suitable approach.
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