China's Foreign Currency Reserves Fall But It's Still A Currency Manipulator

Tim Worstall
I have opinions about economics, finance and public policy.

China’s foreign currency reserves have fallen slightly in the latest figures. Which might be showing that the country is still a currency manipulator as charged by Donald Trump and others even if a little bit less of one. Sadly though for that theory of economic war and the necessary protectionism to win it while China is still indeed a currency manipulator it manipulates the value of the yuan up, not down. Thus producing exactly the opposite to the effect alleged. This makes exports from China more expensive for us and our imports to there cheaper for them.

The news itself:

BEIJING, Aug. 7 (Xinhua) — China’s foreign exchange (forex) reserves dropped slightly in July as downward pressure eased thanks to a stronger yuan, the Chinese currency, official data showed on Sunday.

Looking forward, China’s forex reserves data may improve, as yuan, also known as the RMB, is expected to stay largely stable and forex outflows to slow down, a research team said after the data was released.

Forex reserves stood at 3.201 trillion U.S. dollars at the end of July, down from June’s 3.205 trillion dollars, according to data released Sunday by the People’s Bank of China (PBOC), the central bank.

This is pretty much what everyone expected so don’t assume that markets are going to leap around as a result.

The reserves’ stabilization shows capital-outflow pressures have eased because of a weaker dollar, and the central bank doesn’t need to defend the yuan. The yen and euro strengthened last month, aiding the dollar valuation of the stockpile, on haven demand amid Britain’s vote to leave the European Union.

The general allegation is that China buys up lots of foreign currency with the yuan. This then lowers the price of the yuan in terms of foreign currency. Thus exports from China are cheaper in terms of that foreign currency. This is the basis of the allegations of currency manipulation. China is flooding America with imports by doing this.

As a piece of economics this doesn’t work in the first place. For Americans getting cheaper Chinese goods makes Americans richer. This is not known as losing the game, being made richer. However, as you can see there, recently China hasn’t even been trying to reduce the value of the yuan. They’ve been trying to increase it:

Recommended by Forbes
MOST POPULAR Exclusive: Bret Hart Lets Loose On Seth Rollins, Goldberg, WWE Creative, Cody...
China's Currency Valuation: Room For Improvement
Everyone's Favorite China Bet: A Cheaper Yuan
OracleVoice: Why Even You Should Care About Java Code Libraries

As Donald Trump Says, China Is A Currency Manipulator, Just Upwards, Not D...
China's Overcapacity Is A Direct Consequence Of Past Currency Manipulation
MOST POPULAR Photos: The Richest Person In Every State
TRENDING ON FACEBOOK 'Suicide Squad' Is A Blast, But Reviews Are A Dumpster Fire Of Hyperbole
MOST POPULAR Photos: The Most Expensive Home Listing in Every State 2016
MOST POPULAR Exclusive: Bret Hart Lets Loose On Seth Rollins, Goldberg, WWE Creative, Cody...
China's Currency Valuation: Room For Improvement

The yuan has eased another 2 percent this year and is hovering near six-year lows, but official data suggests speculative capital flight is under control for now, thanks to tighter capital controls and currency trading regulations.

Not just the FX interventions which led to the fall in reserves. But those capital controls there. Chinese people are prevented from simply shipping their money out of the country. If there were no capital controls then the general consensus is that there would be a flood of money out of the country and out of the yuan. Thus the restrictions increase the current value of the yuan. That is, yes, China is a currency manipulator but in exactly the opposite direction to that alleged. They are manipulating the value up, not down, and this reduces, not increases, the US trade deficit with China.

In fact, it would almost be worth allowing the designation of China as a currency manipulator. Because then someone would have to calculate by how much it is one. And, of course, in which direction. The result would be that it is, mildly, but upwards. And the result of that would be, logically, that far from having protective tariffs against Chinese goods then the US should subsidise Chinese imports into the US. It would, almost, be worth going through the process just to see the resultant heads exploding.