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President Donald Trump’s trade war with China is threatening to draw one of the global economy’s neutral referees into the fray: the International Monetary Fund.
As part of his campaign to pressure Beijing into changing its trade practices, Trump last month formally declared China a currency manipulator. But in a move that risks undermining the IMF’s place as an arbiter for sound economic policy, Treasury Secretary Steven Mnuchin has also been quietly pushing the fund to endorse its view -- just weeks after the IMF found China’s yuan was fairly valued and declared there was no evidence of manipulation by Beijing, according to people familiar with the matter.
The decision by the U.S., the IMF’s largest shareholder, is putting new pressure on the institution as it undergoes a sensitive leadership transition following Christine Lagarde’s departure for the European Central Bank. It also adds another point of tension to Trump’s more than year-long assault on the global trading system.
1980s Law
IMF officials have quietly rebuffed Treasury attempts to draw it into the fight as they try to avoid getting caught in the economic battle between the world’s two largest economies.
The fund considers China’s yuan as fairly valued, does not find evidence of manipulation, and sees no need to revisit the country’s currency practices, according to public comments by officials and people familiar with the matter who requested anonymity. The lender is not planning to change that view at the behest of the Trump administration, the people said.
Mnuchin’s formal designation that Beijing manipulates its currency was justified using a 1980s trade law with looser standards for the label, ignoring a 2015 law with a more detailed criteria.
The standoff is likely to be high on the agenda for Kristalina Georgieva, who is widely expected to formally succeed Lagarde as the IMF’s managing director within weeks.
In Treasury’s Aug. 5 statement designating China a manipulator, it said it would engage with the IMF to eliminate “unfair” currency practices. Two days later, Mnuchin spoke to IMF acting managing director David Lipton to plan consultations on China’s currency, along with other issues, according to a Treasury spokesman.
The IMF decided against any public comment in response to that statement and instead use a scheduled briefing on it’s annual Article IV report on China’s economic health to send its own message, according to one person familiar with the matter.
A Treasury spokesman said that meeting with the IMF regarding certain countries is common, declining to comment further. An IMF spokeswoman declined to comment.
The IMF has so far not started any formal process to work with Treasury to address China’s currency regime, and instead plans to offer subtle push-back on the U.S.’s manipulation charge, according to people familiar with the matter.
Mnuchin, however, sees otherwise.
“There will be bilateral discussions and discussions between the IMF and China,” the Treasury chief told Bloomberg News in an Aug. 28 interview. Mnuchin said he spoke to People’s Bank of China Governor Yi Gang shortly after his designation on the yuan.
Mnuchin labeled China a currency manipulator -- a move seen as largely symbolic -- the day after the yuan broke the 7 per dollar level for the first time since 2008, unleashing tumult across global markets. Mnuchin’s announcement followed a declaration by China’s central bank that the nation wouldn’t use the yuan as a tool to deal with trade disputes, a statement that Mnuchin viewed as an acknowledgment of intervention, according to people familiar with the matter.
There is evidence of the IMF’s indirect rejection of Trump’s views of the yuan, which gained little traction.
“We see RMB in 2018 as broadly in line with medium-term fundamentals and desirable policies” and “not significantly over or undervalued,” James Daniel, an assistant director in the IMF’s Asia Pacific office, said in an Aug. 13 call with reporters. “We will conduct further analysis in 2020, as part of standard IMF processes.”
The IMF reiterated that message last week in China: The yuan “is assessed to be in line with fundamentals,” Longmei Zhang, deputy resident representative for the IMF in China, told reporters, the South China Morning Post reported.
The Trump administration’s relationship with the IMF may start to improve soon. Mnuchin backs Georgieva, the World Bank’s chief executive, to replace Lagarde as the IMF’s managing director, and the Treasury secretary has a good working relationship with her, according to people familiar with the matter. European governments last month selected her as their nominee.
Georgieva could be installed at the IMF as soon as early October, at which point Mnuchin could renew efforts to engage the lender in addressing Beijing’s currency policy.
One option could be requesting a “special mission” where the IMF would examine China’s currency regime, according to one person. The move would be unprecedented and would likely be blocked by the Chinese, they said.
Such a report may also find that Trump’s tariffs caused the recent large swings in the yuan. Mnuchin and U.S. Trade Representative Robert Lighthizer have said previously that there will be a currency “chapter” in any trade deal struck with China, through they’ve given few specifics on what would be in it.
Exchange-Rate Flexibility
The IMF’s disagreement’s with Treasury began before the administration labeled China a currency manipulator.
In July -- before the yuan slumped to a decade low -- Treasury urged the IMF to use its annual report on China’s economic health to encourage it to stem the yuan’s depreciation, according to people familiar with discussions. While such disagreements aren’t unusual, the Treasury Department sent nearly a dozen officials to the IMF in July to express dissatisfaction with the upcoming report, which was released on Aug. 9.
The officials told the IMF that its key message on currencies should not be in support of exchange-rate flexibility, and that if it must address foreign-exchange, the fund should encourage a policy that strengthens the yuan, the people said. That’s because a weaker renminbi would counter the effects of Trump’s trade tariffs, they said.
But their argument failed to work, and the IMF did not make any changes to its conclusions, they said. Such meetings between the U.S. and the IMF about a particular country are routine.
Mnuchin had refrained from formally labeling China a currency manipulator in Treasury’s semi-annual report on foreign-exchange policies based on the 2015 criteria, even amid tense trade talks. The next report to Congress on currency policies is expected in October.
(Updates with additional context from 22nd paragraph)
