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Trump should get facts right on China

Trump should get facts right on China

Currency manipulation claims ignore reality

by Sijia Wang in London

Mon 12 Dec 2016

Donald Trump has been making headlines with his claims that China has been unfairly manipulating the renminbi. The president-elect says Beijing has been winning an advantage in a battle of exports and imports, which he alleges stands in the way of his plan to ‘make America great again’.

Larger-than-life figures like Trump are an important part of the international landscape. There are several similar personalities in Asia with whom the president-elect should develop a degree of fellow feeling.

However, Trump should not blatantly disregard reality. There are basic facts about China’s trade balance and the level of the renminbi that he should consider before issuing more diatribes on the subject.

First, China has been manifestly intervening in the market not to promote the depreciation of the renminbi – which would buttress Trump’s claims that Beijing is a currency manipulator – but to stop it declining further. China’s foreign currency reserves, the world’s largest, fell by $69.1bn to $3.05tn in November, the biggest monthly fall since January.

For several reasons, China is suffering outflows. The authorities have taken steps to rectify this position, not least by intervention in the currency market. This is in line with China’s commitment to stable and orderly conditions in world currency markets – a policy which ties in with the country’s G20 undertakings and meets the need of other large economies.

Second, China’s trade and current account imbalances have been falling. From a peak of around 9% of GDP before the financial crisis, the current account surplus is due to fall to 2.4% of GDP this year from 3.0% in 2015, according to the International Monetary Fund. Over the last 10 years, China has been a stabilising force in the world economy by substantially reducing its external disequilibria.

This is in marked contrast to countries such as Germany and the Netherlands, where current account surpluses this year are 8.6% and 9.1% respectively, up from 5% and 8% in 2006. Over the same period the UK current account deficit has risen to 5.9% from 2.2%, while that of the US declined to 2.5% from 5.8%.

Third, it might have been true that, five or six years ago, the renminbi was undervalued, but that position has now been rectified. According to effective exchange rate data from the Bank for International Settlements, the renminbi has appreciated by 32% on a nominal basis, and 39% in real terms over the past 10 years. While there has been a decline of 2.6% and 2.3% respectively in the past two years, these figures need to be put in perspective. China has been making its exchange rate system more market-orientated, in line with the IMF precepts which were among the conditions for the renminbi to join the Fund’s special drawing right on 1 October.

As with any long-term currency move, there will always be the potential for disruption. China will not become a fully liberalised system in the near future. Restrictions on foreign companies remitting dividends out of China are one sign of residual currency controls. These are necessary to protect a still-developing country from the hazards of untrammelled currency flows.

These measures illustrate that China supports business growth, both domestically and internationally. It is doing its best to promote the currency, not to manipulate it. Trump should take these points into account before making more comments about the renminbi.

Sijia Wang is Chief Executive of London & Oxford Group, an integrated London-based financial group also present in Shanghai and Tokyo.

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