Lack of G7, IMF support seen dimming impact of U.S. move on China’s yuan

China is unlikely to face serious consequences from the Trump administration’s decision to label it a currency manipulator given the apparent lack of G7 and IMF support for the move, former and current U.S. and G7 officials said.

The U.S. Treasury last week put the designation on Beijing for the first time since 1994, roiling financial markets and escalating a bitter tit-for-tat tariff war between the world’s two largest economies.

An accord agreed by the Group of Seven of the world’s most advanced economies in 2013 says that members should consult each other before taking major currency actions.

But former and current officials said the Treasury failed to make those consultations, contradicting White House economic adviser Larry Kudlow’s claim that G7 members were on board.

European countries were astonished by the lack of coordination, one senior official of a European G7 country told Reuters, asking not to be named because they were not authorized to speak to the media.

The day after the announcement, German Finance Minister Olaf Scholz warned against stoking tensions at a time when trade conflicts were already hindering growth.

“A further escalation will only do damage,” Scholz said in a statement, adding, “Everyone should keep a level head and tone down the rhetoric a bit.”

Monday’s designation came just hours after President Donald Trump tweeted that China was manipulating its currency following a drop in the yuan below 7 to the dollar, which itself occurred a few days after Trump said he would impose a 10% tariff on an additional $300 billion worth of Chinese goods. A weaker yuan makes Chinese imports cheaper.

The announcement came as a surprise to many at the White House, especially since Treasury did not classify China as a manipulator in its latest semi-annual currency report in May, a person familiar with the matter said.

Under a 1988 U.S. currency law, the main purpose of the designation is to force negotiations with the offending country to eliminate any unfair advantage. If no solution can be found, the president can impose penalties.

China denies that it has manipulated the yuan for competitive gain.

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IMF, G7 STAY MUM

The International Monetary Fund has been reluctant to comment on the U.S. move. The United States is the IMF’s largest shareholder and has strong sway over who will be its new leader after Christine Lagarde resigned last month.

A U.S. Treasury official said Secretary Steven Mnuchin spoke with IMF Acting Managing Director David Lipton this week by telephone about currency consultations and also about the leadership succession. The official offered no further details.

On Friday, the head of the IMF’s China department, James Daniel, stood by the fund’s assessment last month in a report on currencies and trade balances that the value of China’s yuan was broadly in line with economic fundamentals.

He provided no clues to the path forward on the IMF’s engagement with Treasury.

“Our discussions with the U.S. Treasury are ongoing on a range of issues,” Daniel told reporters on a conference call about the Fund’s annual review of China’s economic policies.

G7 officials have also declined to discuss the issue despite repeated queries.

Prominent economists, including former IMF chief economist Maurice Obstfeld and former Treasury Secretary Larry Summers, say there is no evidence to support the move.

China’s global current account surplus is close to zero and Beijing has spent hundreds of billions of dollars to prop up the yuan‘s value in the face of mounting tariff pressures.

“It’s extremely hard to make an objective case that this is warranted,” said Obstfeld, now an economics professor at the University of California-Berkeley. “The administration seems to be saying that the Chinese authorities could have prevented the yuan from declining and didn’t.”

Fred Bergsten, a former U.S. Treasury official and senior fellow at the Peterson Institute for International Economics, agreed the U.S. position was hard to justify.

“There’s no chance that any of the G7 countries or any other country would support the United States on this because there is no evidence that China is manipulating its currency,” he said.

Even if the IMF did back the United States, it was unlikely that members would be able to reach a consensus on action, Bergsten said, pointing to the fact that they couldn’t do that even in 2007-2008, when China was spending $2 billion a day to lower the value of the yuan.

COORDINATION THE NORM

For the moment, European nations are in no mood to aggravate China or support Trump given his threats to impose tariffs on EU exports, said Stephanie Segal, a former senior Treasury official now at the Center for Strategic and International Studies.

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Any attempt to intervene on currency markets would be difficult to do alone, Segal said.

“Currency markets are just too big to act unilaterally, even if it’s the United States,” she said. “It’s not sustainable.”

Naoyuki Yoshino, dean of the Asian Development Bank Institute and former chairman of the Japanese Ministry of Finance’s council on foreign exchange, said the announcement was all about politics, not economic fundamentals.

“The best solution is (for China) to open its capital market,” he said. “Then, if their exports keep on going, capital inflows will come and then the (yuan) should automatically appreciate,” he said.

This currency move would not be the first time that the Trump administration has ignored established policy-making protocols to carry out the president’s directives.

Philip Diehl, a former senior U.S. Treasury official who ran the U.S. Mint when China was last labeled a currency manipulator in 1994, said the designation followed intense deliberations within the Treasury and State Departments that also weighed human rights issues.

He said the Trump administration’s actions call into question the legitimacy of the whole process for evaluating currency manipulations.

“They’re not well thought out, they’re impulsive and they do not appear to be coordinated with our allies,” Diehl said.