Is China a Currency Manipulator? Data Say No – WSJ

The yuan is outperforming the currencies of many of its trading partners

The Chinese yuan slumped to an eight-year low against the U.S. dollar this week.

For president-elect Donald Trump, who has long accused China of weakening its currency to boost exports, this looks like a vindication of his views.

But a closer look reveals a more nuanced picture. The Chinese yuan is performing significantly better than most other major currencies. Only when viewed against the U.S. dollar does the yuan appear weak. At any rate, it’s hard to see any sign that Beijing is engineering a devaluation.

Indeed, a careful read of the data shows the yuan to be artificially strong – at least when measured against the basket of currencies that China’s central bank is meant to track.

This basket – comprised of currencies belonging to China’s main trading partners, and weighted according to their trading volumes with China – shows China could be doing more to cheapen the yuan.

The Chinese yuan has been steadily depreciating this year against a basket of 13 currencies that make up the underlying reference point for the currency.

Every day, the People’s Bank of China (PBOC) sets a daily reference rate for the currency based on the movement of the components of the basket, and its so-called fix at 9.15am every day (Beijing time) is a closely watched event. Onshore, the yuan can move within 2% of this level.

An index from Thomson Reuters and Hong Kong Exchanges & Clearing, designed to broadly replicate this basket, shows that the yuan has been fairly stable since July — despite losing strength against the U.S. dollar over the same period. The U.S. election hasn’t yet changed that. In fact, the yuan actually gained some strength against the basket after the results were known.

The U.S. dollar is the biggest component of the basket, and alongside the pegged Hong Kong dollar, the two jointly account for a third of the basket’s weighting.

Investors are anticipating a sharper pace of inflation in the U.S. as a result of president-elect Donald Trump’s multi-billion dollar economic stimulus plans, and of more aggressive rate increases by the U.S. Federal Reserve. As a result, the dollar is gaining strength against global currencies.

HSBC lowered its forecasts on the yuan to 7.2 against the U.S. dollar by the end of 2017, weaker than its previous target of 6.9, and warns that the prospect of a trade war with the U.S. breaking out could spark volatility in the currency. “Markets will now be hyper sensitive to what Trump says about China and the renminbi,” the bank wrote in a research report, using another name for the yuan.

Sharp decreases in emerging market currencies could put more pressure on the yuan, said Andy Seaman, chief investment officer at Stratton Street Capital in London.

“If expansionary fiscal policies [in the U.S.] are adopted, they’re going to have to tighten more rapidly than they would have done otherwise,” he said. “It’s going to put emerging economies under significant amounts of pressure … you’d expect the currencies to weaken under those conditions.”

Though individual currencies such as the Russian ruble and the Thai baht exert a small amount of pressure on the PBOC’s basket, if they become much more volatile that could add to pressure on the yuan to weaken, Mr. Seaman said.

He suspects that volatility in emerging market currencies could force the PBOC to adopt a more flexible exchange rate regime.

And another wrinkle: It’s not just emerging market currencies that have fared badly since the U.S. election result. The euro and the Japanese yen, which collectively make up another third of the PBOC’s basket, have also underperformed.

The upshot is that the yuan has performed well since the U.S. election. It’s outperformed the trade weighted basket of currencies Beijing has committed to track and, indeed, it’s the third best performing currency against the U.S. dollar after the British pound and the Hong Kong dollar — which is pegged to the greenback.

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com