Will Donald Trump take on the Chinese yuan? (Column: Currency Corner)

China has long been labelled a currency manipulator, having an unfair advantage in the global export arena. However, these allegations have never stopped Beijing from intervening in the currency markets at will, without taking into consideration the negative spillover effects on FX volatility and global trade.

But now it seems that US President Donald Trump is all set to unleash a new tactical strategy on China and its currency policy. There has been no official announcement on this matter out of the White House as yet, but it is extremely likely that the author of "The Art of the Deal" will start deploying his hardball approach on China soon.

The US Trade Facilitation and Trade Enforcement Act of 2015 uses three "assessment factors" for labelling a country as a currency manipulator. They are:

* It has a material bilateral trade surplus with the US, which the Treasury has currently set at a nominal value of $20 billion.

* It has a material current account (CA) surplus, which the Treasury sets at a benchmark cutoff of three per cent of the GDP.

* It engages in persistent one-sided intervention in the foreign exchange market, which the US describes as being more than two per cent of its GDP over the year.

China meets the first two conditions but due to the unreliable nature of foreign exchange data out of the country, it is hard to determine whether the third condition holds or not.

India, of course, by the virtue of its current account deficit is not on this list.

It is important to note that labelling China (or any other country for that matter) as a currency manipulator doesn't carry much teeth under law unless it can be reinterpreted as an unfair subsidy. Thus, it would be fair to assume that the US Commerce Secretary would now designate currency manipulation as an unfair subsidy.

This would potentially open doors for US imposing countervailing duties/tariffs which would then be outside of the World Trade Organisation (WTO) framework. While WTO has rules against subsidies, the rules do not encompass currency manipulation. Such a move would be a big departure from the norm and would give US additional arsenal for trade negotiation; it may also lead to an escalation of WTO dispute filings and retaliation if US follows through on this threat.

More importantly, this could influence trade and FX policy in some countries as a pre-emptive move to counteract this US policy shift. The article also says that US would no longer single out China but that its measures related to currency would apply to "other countries" as well. Japan, South Korea, Thailand and Vietnam are all at risk amongst the Asian economies.

It would be interesting to see the price action in the global currency markets and China's response to these potential actions. One can only hope that The Donald does not ignite a global currency war.

( is Chief FX Strategist at D.V. Capital. The views expressed are personal. He can be contacted at vatsal.sriv@gmail.com)

--IANS

vatsal/vm/sac