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Treasury Declares China A 'Currency Manipulator,' Escalating Trade War

Aug 5, 2019
Originally published on August 7, 2019 12:04 am

The Treasury Department formally labeled China a currency manipulator Monday, after Beijing allowed its currency to fall to an 11-year low. The tit-for-tat moves mark the latest escalation in the two countries' trade war, which triggered a sharp sell-off on Wall Street.

While President Trump has long accused China of tinkering with its currency to gain an unfair advantage on world markets, this is the first time in a quarter century the U.S. has formally accused Beijing of currency manipulation.

The Treasury secretary will work with the International Monetary Fund "to eliminate the unfair competitive advantage created by China's latest actions," the department said in a statement.

China's devaluation came days after Trump announced plans to level new tariffs on some $300 billion in Chinese imports, beginning in September. China also responded by suspending its already limited purchases of U.S. agricultural products.

Signs the two sides are digging in for an extended trade battle rattled investors on Monday. The Dow Jones Industrial Average fell 767 points, or 2.9%. The S&P 500 fell nearly 3%.

"Any investor who had anticipated that President Xi and President Trump would shake hands and reach some kind of an agreement by year-end is probably scratching that scenario off their blackboard," said Jack Ablin, chief investment officer of Cresset Capital in Chicago.

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RACHEL MARTIN, HOST:

The stock market appears to be rebounding a bit this morning, regaining some of the ground it lost yesterday. And there were signs of a possible reprieve from the all-out trade war between the U.S. and China. China's central bank took steps overnight to prevent a freefall in the country's currency. A day earlier, the currency hit an 11-year low, prompting complaints from the U.S. Treasury Department. We've got NPR's Scott Horsley in the studio to explain what all this means. Hi, Scott.

SCOTT HORSLEY, BYLINE: Good morning, Rachel.

MARTIN: So yesterday was a bad day for the market, the worst all year right? What are we seeing today?

HORSLEY: Stocks have bounced back a little bit. Yesterday, both the Dow Jones Industrial Average and the S&P 500 were off about 3 percent. So far this morning, they've regained a fraction of that. The Dow is up about four-tenths of a percent, the S&P up about six-tenths of a percent. The markets are still pretty jittery, though. White House economic adviser Larry Kudlow tried to offer some reassurance this morning. He told CNBC there's still a chance of a truce in the U.S.-China trade war.

(SOUNDBITE OF CNBC BROADCAST)

LARRY KUDLOW: As difficult as things may be - and I know the markets are a bit volatile - but the reality is we would like to negotiate. The president has said, you know, if you make good deal or good progress on a deal, maybe he'll be flexible on the tariffs. On the other hand, if there's no progress on the deal, then the tariffs might get worse. But he's open to it.

HORSLEY: The sell-off on Wall Street really began last week when the president announced plans to slap new tariffs on another $300 billion worth of Chinese goods. And the drop in stocks on Monday - the stocks dropped yesterday after China allowed its currency to fall.

MARTIN: Right. So what's happening with the Chinese currency now?

HORSLEY: China's central bank says it is committed to maintaining the basic stability of the currency and says it won't use devaluation to gain a competitive advantage - making its own exports more affordable, for example. China's currency is still trading below seven to the dollar, which is a threshold that China had maintained for a long time. But for the moment at least, it looks like China's not going to just let the currency drop a lot below that. Last night, the Treasury Department officially labeled China a currency manipulator, which is a step the president has long called for but hadn't actually done until just now. The odd thing is most analysts say China didn't so much artificially depress its currency yesterday as just stop taking artificial steps to prop that currency up.

MARTIN: Can you explain, Scott, why these currency moves cause so much havoc in the market?

HORSLEY: Lower currency does make Chinese goods cheaper on the world market and puts U.S. manufacturers at a competitive disadvantage. But even beyond the actual currency moves, what the market seems to be reacting to in recent days is just a threat that both the U.S. and China are digging in in this trade war. Earlier this year, markets were kind of hoping there'd be a quick resolution. Now that's looking less likely. Jack Ablin of Cresset Capital in Chicago says that's causing a lot of volatility.

JACK ABLIN: Any investor who had anticipated that President Xi and President Trump would shake hands and reach some kind of an agreement by year end is probably scratching that scenario off their blackboard.

HORSLEY: Now, Larry Kudlow, always the sunny optimist, tried to put the best face on this this morning, telling CNBC that there is going to be another round of negotiations here in Washington next month. The last couple of rounds, however, have not yielded much progress. And the uncertainty that's resulted from that has led to a slowdown both in the U.S. factory sector - and, Rachel, this week there were signs the much-larger services side of the economy is slowing down, as well.

MARTIN: NPR's Scott Horsley for us. Thanks, Scott. We appreciate it.

HORSLEY: You're welcome.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.