The U.S. Treasury Department on Monday designated China as currency manipulator, a historic move that no White House had exercised since the Clinton administration.
“Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator,” the Treasury Department said in a release. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”
The formal designation — the first since President Bill Clinton’s administration in 1994 — came after China on Monday allowed its currency to breach a psychological level.
“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department added. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain unfair competitive advantage in international trade.”
The yuan fell to 7 against the dollar earlier in the session for the first time since 2008.
“I think many people in the private sector may not conclude it is a currency manipulator. The key rule is it’s not intervening consistently or persistently to weaken the currency and therefore the private sector, like economists and strategists may not be convinced,” said Marc Chandler, chief market strategist at Bannockburn.
“This is another step in the currency war,” he added. “This also makes trade more difficult. This is probably bi-partisan. Many Republicans and Democrats think china is taking advantage of us.”
Even before the formal designation, President Donald Trump took to Twitter to voice his opinion, accusing Beijing of manipulating its currency as the trade war between the world’s largest economies intensified.
“China dropped the price of their currency to an almost a historic low,” Trump said in a tweet. “It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
That drew support from the other side of the political aisle on Monday, when Senate Democratic Leader Chuck Schumer supported designating China a currency manipulator.
“China has been manipulating their currency long-before and since President Trump took office,” the New York politician said in a statement. “He should finally tell his Treasury Secretary to label China a currency manipulator. That’s all he needs to do to make it happen.”
The next step is for the U.S. to make its case to the IMF, but it’s not likely to lead to formal penalties. The manipulator label is mostly symbolic and matters more as a slight to one of the United States’ biggest creditors and an escalation in the trade war.
The Treasury Department’s announcement centered around a 1988 portion of federal law that permits the U.S. Treasury Secretary to work with the IMF to “eliminate the unfair advantage” associated with currency manipulation.
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“As a rhetorical matter, I think this is a very big deal. It’s something that has been in the ether for some time; I think the Chinese have been concerned about it mainly in terms of how they’re perceived by others,” said Nathan Sheets, chief economist at PGIM Fixed Income.
“Where it’s less biting is that the 1988 statute they’ve invoked that has no concrete remedies,” Sheets added. “It’s about referring them to the IMF and having consultations with them.”
The currency’s move came after Trump ratcheted up the trade war last week, slapping 10% tariffs on another $300 billion worth of Chinese goods, effective Sept. 1. Until Monday, the Trump administration had passed on five opportunities to label China as a currency manipulator.