Why the US has changed its tune on the yuan

Treasury Secretary Steven Mnuchin prepares to testify at a Senate Banking Committee and International Policy hearing on Capital Hill May 18, 2017 in Washington, DC. Image copyright Getty Images
Image caption Positive words about China from the Trump administration. What's changed?

A funny thing happened in the US on Thursday night. Steve Mnuchin, the US Treasury Secretary, testifying in a senate banking committee hearing, said something positive about China.

In response to a question from the floor about why the US has yet to name China a currency manipulator - an often repeated vow made by President Trump on the campaign trail - Mr Mnuchin responded that recently, "China has used its currency reserves to go in the other direction which is actually good for American workers".

Think about that for a second.

China has gone from being evil-incarnate to now suddenly being quite "good" for American workers.

So what's caused this change of heart? Well to be fair, it's not a complete turnaround.

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Let's look at the facts.

The US still has China on a watch-list of countries that it has highlighted as ones to monitor for currency manipulation. Others include Japan, Taiwan, Korea, Switzerland and Germany.

Image copyright AFP
Image caption During campaigning, Mr Trump said he would be tough on China

China still sells far more to the US than the US does to China. China's goods trade surplus with the US was at $347bn in 2016 - by far the largest among any of the US's major trading partners - and has only declined by 5% from the peak in 2015.

The Trump administration has claimed - and some economists agree - that a lot of that is down to the weak Chinese currency, which makes Chinese goods less expensive overseas. (It also has to do with lower labour costs, electricity subsidies and government support.)

But recently China's currency has actually been strengthening, by nearly 1% against the US dollar since the beginning of this year.

Remember China's currency isn't free the way other currencies are, the central bank sets a rate for it and it can trade within a band of 2% up or down from that point.

And this week China's central bank fixed the yuan's rate at a three-month high - a pattern that has been going on for some time.

What Beijing is doing has nothing to do with Trump's complaints - it is more a domestic Chinese problem.

China is worried about the recent stock market and bond market troubles, as well as capital outflow - money leaving the country as the economy slows down. That's people deciding they would rather take the risk and buy a property in Vancouver than keep their money in China.

So economists say the central bank is trying to keep the currency strong, to infuse confidence amongst the domestic population about the economy.

But while the yuan is heavily managed it is not completely unaffected by what happens in global markets. Further US interest rates rises, for instance, could push more money into the US dollar - thereby weakening the yuan - and weaker Chinese growth could do the same thing.

All of which means by the end of the year, the Chinese currency could end up being weaker than it is now - at which point it may become a key area of focus for Mr Trump's administration yet again.

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