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Trump’s Chinese Scapegoat

ITHACA – US President-elect Donald Trump has once again managed to turn facts on their head. As part of a broader effort to take China to task for supposedly “raping” the United States economy through unfair trade policy, he has now renewed his accusation that the country manipulates its currency in order to gain an advantage for its exports. Such statements are as dangerous as they are unmoored from reality.

Make no mistake: Trump’s accusation of Chinese currency manipulation is not supported by the facts. On the contrary, for the last two and a half years, the People’s Bank of China (PBOC) has been intervening in currency markets for the opposite purpose: to prevent the renminbi’s value from falling too sharply against the dollar.

China has lately faced a surge in capital outflows, which has created substantial downward pressure on the renminbi’s exchange rate. Those outflows are partly a result of the Chinese government’s easing of capital-account restrictions – an effort that should allow households, corporations, and institutional investors to diversify their portfolios by increasing their foreign holdings. The outflows also reflect concerns about China’s economic prospects, including mounting financial risks, as well as fears among some wealthy Chinese that they may be targeted by President Xi Jinping’s anti-corruption drive.

Rather than allow the renminbi’s value to decline as fast as markets would dictate, the PBOC has stepped in to limit capital outflows and offset depreciation pressure. And China has incurred substantial costs: the PBOC’s efforts to keep the value of the renminbi relatively stable against the dollar has contributed to a nearly $900 billion decline in China’s foreign-exchange reserves from its June 2014 peak of about $4 trillion. (The falling value of currencies like the euro and the yen – which account for a share of China’s reserves – relative to the US dollar has also contributed to the decline.)