China avoids U.S. manipulator tag, but not off the hook on trade

SHANGHAI (Reuters) - U.S. President Donald Trump may have decided not to declare China a currency manipulator, an acceptance of the difficulty of making such a charge stick, but that doesn’t mean Beijing is off the hook.

FILE PHOTO: Chinese Yuan bank notes are seen at a vendor's cashbox at a market in Beijing April 10, 2013. REUTERS/Kim Kyung-Hoon/File Photo

Trump’s pre-empting of the Treasury Department’s semi-annual report on such matters undoubtedly eased some concerns of an imminent trade war with China, but Washington has already opened up new fronts to target its large trade deficit with Beijing.

“We are definitely not out of the woods in the bigger scheme of things,” said Louis Kuijs of Oxford Economics in Hong Kong. “Currency is one thing, but I do think that they have not given up. On the contrary, they will be looking at ways to take steps.”

Trump cast the decision not to pin the manipulator label on China as a possible quid pro quo, suggesting it might make Beijing more inclined to help resolve an escalating row with North Korea over its nuclear weapons programme. It was also an acknowledgement, however, that Beijing had not recently intervened to weaken its currency.

The move was expected to help foster the friendlier tone between the world’s top two economies since Trump hosted President Xi Jinping in Florida last week.

Chinese foreign ministry spokesman Lu Kang on Thursday reiterated China’s pledge to avoid competitive devaluations to support exports, adding: “We are willing to expand cooperation in a push for the development of a balanced trade relationship with the United States.”

On Thursday, the yuan hit a two-week high after Trump’s remarks, in which he also said the U.S. dollar was too strong.

At the previous Treasury review in October, under the Obama administration, China only met one of the three criteria used to determine currency manipulation, and that was the size of its trade surplus with the United States.

Three other Asian economies - Japan, South Korea and Taiwan - met two of the criteria, and the view seemed to be that while currency manipulation charges may not stick now, the U.S. would still be tackling what it saw as trade imbalances.

“There is no change in our stance that the likelihood of us getting that label is low, but we won’t be lowering our guards,” Bank of Korea governor Lee Ju-yeol said on Thursday, after his board held monetary policy steady.

“The ultimate aim of putting one under ‘enhanced analysis’ using the currency report is to reduce the trade deficit for the U.S., so they might assess valuation of each currency based on that,” he added.

Figures on Thursday showed China’s trade surplus with the United States was $49.6 billion in the first quarter of 2017, little changed from $50.6 billion a year earlier.


On the campaign trail Trump had pledged to immediately label China a currency manipulator, and he remained critical once in office, but the backdown is unlikely to be a sign of any slackening in his resolve to shrink the trade deficit.

Last month, the U.S. Commerce Department launched a review of whether China should be allowed the status of a ‘market economy’, which under World Trade Organization rules would constrain other countries from taking anti-dumping measures against some Chinese imports. The department is also studying trade abuses and their effect on U.S. trade deficits.

The U.S. Trade Representative’s office, controlled by the White House, criticised Beijing on a range of trade issues from industrial overcapacity to forced technology transfers and long-standing bans on U.S. beef and electronic payment services.

Jonas Short, with the research firm North Square Blue Oak Ltd in Beijing, said Trump could easily flip back to a more hostile stance if his popularity wanes among the supporters he fired up on the campaign trail by, in part, bashing China.

Analysts have also suggested that once the Treasury Department is staffed up by the new administration, it could re-think the three criteria of currency manipulation that now guide its semi-annual process. The results of the next review are due out in six months.

“There are demons below the surface and, given the unpredictable start of the Trump administration, it’s very hard to see what will happen come October,” Short said.

For a graphic on U.S. currency manipulation report, click - here

Additional reporting by Cynthia Kim in Seoul; Reporting by John Ruwitch; Editing by Will Waterman