<p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">The next phase of the economic conflict between the US and China could be a currency war. It could come if China is labelled as a currency manipulator in the next US Treasury report. </span></span></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3"><b><span style="text-decoration: underline;">1. China </span></b><b><span style="text-decoration: underline;">as a</span></b><b><span style="text-decoration: underline;"> currency manipulator</span></b><b><span style="text-decoration: underline;"> </span></b></span></span><b><span style="text-decoration: underline;"></span></b></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">China could be labelled as a currency manipulator as early as next week. The US Treasury report of “Foreign Exchange Policies of Major Trading Partners of the United States” is expected to be published in the middle of April. This report reviews the major currency policies of top trading partners of the US and could be used as a tool in the trade war between the US and China. </span></span></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">In the October 2017 report, the US Treasury avoided naming China as a currency manipulator. A reason could be the avoidance of strain relationship with China as Trump was slated to visit China in November. </span></span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Trump has also avoided tagging China as a currency manipulator as it requires China’s help in controlling the nuclear threat from North Korea. </span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"></span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Today, the situation has reversed. The relationship between President Trump and North Korean leader Kim Jung Un are less tense and they could even be meeting in the near future. On the other hand, the bond between the US and China has deteriorated and they are engaged in a testy trade war. Therefore, Trump could use this opportunity to label China as a currency manipulator and further escalate trade war tensions.</span></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">2. Criteria for currency manipulator label</span></span></b></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">A country has to fulfil three criteria for the label of currency manipulator. The criteria includes: (1) a significant bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in persistent one‐sided intervention in the foreign exchange market. </span></span></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">In the October 2017 Report, US Treasury classified China in the “monitoring list” despite only fulfilling one out of three criteria. A country is on the “monitoring list” only if it fulfils at least two of the critieria. The reason is that China accounts for a “large and disproportionate share” of the overall US trade deficit. For 2017, China accounts for US$375bn of trade deficit with the US, out of which are US$506bn imports and US$130bn exports. </span></span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The last time that China was labelled as a currency manipulator is during the period between 1992 and 1994. China was accused of weakening the Chinese Yuan and restricting the access for the US goods. The tag was removed at the end of 1994 after China took measures to reform its trade and currency policies. Therefore, any label on China could stretch for months and result in a large overhang on markets for a long time. </span></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">3. Manipulation of report</span></span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The offshore Chinese Yuan has strengthened by more than 9% for the past year. This weaken the case for China as a currency manipulator. However, this currency reality count for nothing in the ongoing trade war. Both sides want to hold the upper hand and protect their domestic markets. US President Trump could use the large trade deficit with China as a reason for the currency manipulator label. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Ironically, the US Treasury report could be manipulated to label China as a currency manipulator. </span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"></span></p><p><strong><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Edmund Chan, CFA</span></strong></p>