00:00:05,040 --> 00:00:06,790 COLBY SMITH: Welcome to Charts that Count.

This week, the US removed China's designation

as a currency manipulator.

The decision came just a few days

before the two superpowers signed a phase one trade

deal that put on pause any escalation in the trade

war for the time being.

So how did we get here?

00:00:27,360 --> 00:00:29,939 In order to answer that, we have to rewind the clock

a few months back to the summer.

Now, here is a chart of the exchange rate between the US

dollar and China's currency, the renminbi.

The y-axis here is inverted because as $1 fetches

more renminbi, it means that the renminbi is weakening.

So as you can see in this chart going back to 2019,

the first significant down move in the renminbi

versus the dollar was in May.

Now, what sparked this was the US threatening tariffs

on China.

In August, the US made good on that threat.

The US slapped additional tariffs on China and China

retaliated.

And on August 5, everything came to a head.

The renminbi weakened considerably

against the US dollar, and it actually

crossed a very important threshold--

7 renminbi per dollar.

00:01:22,780 --> 00:01:25,030 A few things about China's currency.

The first is that it is not free floating

like the dollar or the pound, which tend

to be driven by market forces.

Instead, China manages the value of its currency,

and that means the state steps in

to intervene in order to determine

a targeted range at which the renminbi fluctuates

versus other currencies.

It can do this in a few ways.

The first is that each day, the central bank

sets a reference rate around which the renminbi can trade.

The second way is that the central bank and China

can intervene in foreign exchange markets,

and either buy or sell dollars, depending

on where they want the value of the renminbi to go.

The second key point about the renminbi

is that this 7 renminbi level, that I mentioned earlier,

is very psychologically important in the country.

The last time citizens saw a currency weaken

past seven renminbi per dollar was

during the global financial crisis,

and officials have spent lots of time and lots of money

to ensure that hasn't happened since.

So when it did in August, it was an incredibly big deal,

not least because President Trump

had been complaining for a long, long time

that China was purposely weakening its currency to gain

an unfair trading advantage.

Later that day on August 5, the US

responded to the depreciation of China's currency

by naming China a currency manipulator.

This was surprising for a few reasons.

The first is that the US Treasury tends

to evaluate its trading partners and their currency

practises only twice a year.

So in April and October, the Treasury

puts out a report that talks about currency manipulation

and if the trading partners are doing it.

And they outline various criteria

for how to determine whether or not that is the case.

Some has to do with how much a country is intervening

in foreign exchange markets.

Others have to do with how much a country's importing

or exporting versus its peers.

If a country meets three of these criteria,

they are named a currency manipulator.

If they meet just two of their criteria,

they're put on a monitoring list.

China, in August, only met one of the criteria.

And even more importantly, currency strategists

were saying that China was actually

intervening to prop up the currency, meaning

to strengthen its value against the dollar,

not actually weakening it.

See, what was happening when this trade war was swirling

around was that there were growing concerns

that China's economy was slowing down.

And at the same time, the central bank

was pumping stimulus into the economy, which

has the impact in any economy, let alone

in China, of weakening a currency.

Taking this all together, any country facing these concerns

would have seen a depreciating currency, as well.

And you can see as some of these pressures

abated after the summer, the value of the renminbi

actually rises versus out of the dollar.

What was driving this was progress on the US-China trade

war front.

So both sides agreed to no new tariffs.

They sat down and agreed in December

to sign a phase one trade deal.

And the renminbi strengthened as this big looming risk

to its economy dissipated somewhat for the time being.

Now, here we are in early 2020, and the Treasury

has removed this label.

But currency strategists say that this whole saga

should spook the US's trading partners.

It seems as though anyone is at risk

at this point of being named a currency manipulator.