Thread by @Brad_Setser

The U.S. Treasury it seems has decided to name China a currency manipulator roughly 12-13 years after it should have first named China, and roughly 5 years after China stopped manipulating ...

(1/x)

The standard definition of manipulation these days is intervention (buying foreign exchange in the market using the government's balance sheet) to maintain a large (more than 2% of GDP per the Treasury's latest fx report) current account surplus.

China first met that threshhold in late 2003, but it was close -- the current account (as now measured) only just topped 2% of GDP (China's methodology has changed over time).

But there was no real doubt from 2005 to 2008 (and again the years immediately after the crisis)

3/x

I am not sure that the gymnastics required to name China now are larger than the gymnastics required not to name China then. China's surplus was large and growing, and its intervention in the market reached $600b at its pre-crisis peak ...

4/x

One interesting question is when did China stop manipulating -- it likely didn't meet the current criteria in 2012, when reserve growth slowed (the euro crisis led to a reversal of flows) and its CA surplus dipped. but it resumed large purchases in 13 and q1 of 14 ...

5/x

There is another interesting question (to me at least). The conventional wisdom (see Larry Summers today, among others) is that China cannot be manipulating b/c it is selling its reserves. But that isn't totally clear from the data ...

The large sales stopped in 16

6/x

But the large sales stopped, imo, b/c China changed the way it managed its currency to reduce the pressure on its reserves.

Rather than mechanically setting the daily fix at the past days close (adjusted for overnight currency moves), it started using the fix as a signal.

7/x

And it tightened its capital controls, big time at the start of 2017 ...

Both measures have allowed China to manage its currency w-o the purchases/ sales observed in the past ...

8/x

That though doesn't constitute a case for manipulation. China manages its currency, no doubt. But for most of the summer, it was using its ability to signal to the market to signal that it didn't want a depreciation, and if pushed it would fight it ...

9/x

I can see why the Trump administration was upset yesterday. China subtly changed its signal over the weekend, and that led the CNY to depreciate through 7 (bringing it back to levels last seen against the dollar in 2008 ... or almost 12 years ago)

10/x

But it is pretty hard to make the case that China has a requirement to resist depreciation even as the U.S. raises tariffs.

11/x