The steep depreciation of China's currency has revived a question that was once one of the hottest topics in Washington.
Is China manipulating the value of its currency to gain an unfair trade advantage over the United States?
Since April, China's yuan has dropped more than 8 percent against the U.S. dollar, marking the biggest decline over a similar period since the 1990s.
In previous years, such a slide would have sparked heated debates over Beijing's tactics to boost exports and U.S. threats to respond by designating China as a currency manipulator.
That concern has appeared to be relatively muted this year, until now.
On July 20 and again on July 26, U.S. Treasury Secretary Steven Mnuchin said he is monitoring the yuan's depreciation to see whether action is warranted.
"I'm not saying whether it's a weapon or not a weapon. There's no question that the weakening of the currency creates an unfair advantage for them," Mnuchin told Reuters in Sao Paulo, Brazil before a Group of 20 meeting in Buenos Aires, Argentina.
"We're going to very carefully review whether they have manipulated the currency," he said.
The comments came on the same day that U.S. President Donald Trump tweeted that China and the European Union have engaged in manipulation, "taking away our big competitive edge."
On July 23, a spokesperson for China's Foreign Ministry, denied the accusation.
"The yuan's exchange rate is mainly determined by market supply and demand," said Geng Shuang, the official Xinhua news agency reported. "It floats in both ways, which means there are ups and downs."
In a rare "up" for the yuan renminbi (RMB) on that day, the People's Bank of China (PBOC) strengthened the currency against the dollar by 78 basis points, or hundredths of a percentage point, in setting its "central parity rate" through the China Foreign Exchange Trade System (CFETS).
The PBOC says that it uses a weighted average of market prices before the opening of interbank trading each day, allowing two-way fluctuations of 2 percent from the base rate.
Critics say the system is a far cry from free trade in the currency.
"A lower renminbi makes China's exports cheaper to foreign buyers, which is particularly helpful right now when Mr. Trump's tariffs are making many Chinese goods more expensive in the United States market," said an analysis in The New York Times.
"And since China's government manages the value of its currency, the decline certainly has its blessing," the paper said.
Three criteria under US law
Under U.S. laws which have been strengthened since the Omnibus Trade and Competitiveness Act of 1988, the Treasury Department is required to make semiannual reports to Congress on currency manipulation, usually in April and October. The reports have not cited China, or any other country, as a manipulator since 1994.
The reasons are largely technical. Under a 2015 trade law, China would have to satisfy three criteria for designation.
These include a large bilateral trade surplus, a current account surplus over 3 percent of gross domestic product and "persistent, one-sided intervention" to weaken the currency over a 12-month period.
China has previously met only the first of those conditions, according to a blog posting last year by Robert Kahn, senior fellow at the Council on Foreign Relations.
Other reasons for not citing China may fall outside the criteria.
In April 2017, Trump defended a decision against charging China with currency manipulation, citing its help in enforcing sanctions on North Korea.
"Why would I call China a currency manipulator when they are working with us on the North Korea problem?" Trump tweeted at the time.
During the 2016 presidential campaign, candidate Trump criticized China for its currency practices, threatening to impose tariffs of up to 45 percent.
The more recent signs of deliberate depreciation have been debatable.
This year, the yuan has faced an uphill battle against the combined forces of a stronger dollar, rising U.S. interest rates, U.S. tax cuts and tariff threats.
"My opinion is that the RMB will continue to fall unless supported by the People's Bank, because of the pending tariff wars," said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics in Washington.
"I don't see manipulation, just market forces driving it down," Hufbauer said.
Even if the yuan's weakness is the result of market forces, it is hard to gauge how much of a spur it has given to exports so far. But analysts say it could significantly soften the blow from the U.S. $34 billion (232 billion yuan) in tariffs imposed in July.
In the first six months of the year, China's exports to the United States rose 13.6 percent in dollar terms but only 5.7 percent as measured in yuan.
Some economists say depreciation will have a larger effect.
"Yuan depreciation is a relatively effective tool to cushion downward pressures on growth," said Goldman Sachs Group analysts in a research note.
"By helping China's export competitiveness, the slump should boost the country's gross domestic product by 40 to 50 basis points, which is enough to blunt the impact of U.S. levies on $250 billion (1.7 trillion yuan) of Chinese goods," Bloomberg News quoted the analysts as saying.
A 10-percent drop in the yuan against a basket of currencies would add about 80 basis points to China's GDP, Goldman Sachs said.
‘Down the road of using tariffs’
The offsetting impact of a cheaper yuan has prompted the Trump administration to consider doubling tariffs that have been threatened on $200 billion (1.3 trillion yuan) of Chinese goods, from 10 percent to 25 percent, officials confirmed last week.
"Once you go down the road of using tariffs to disrupt the Chinese, you have to say 25 percent compared to 10 percent," said Derek Scissors, a resident scholar at the American Enterprise Institute in Washington, speaking to The Wall Street Journal, which identified him as an expert "who advises the administration on trade."
In an email message, Scissors said that he "talks with the administration on trade," but is not an adviser.
The risks of a trade war have already risen above the $250-billion level with Trump's threat to slap tariffs on $500 billion (3.4 trillion yuan) of Chinese goods.
In the latest clash over hiking tariffs on the $200-billion list of goods, China retaliated last week with a threat to slap penalties of 5 percent to 25 percent on $60 billion (411 billion yuan) of U.S. exports.
But one argument against adding charges of currency manipulation to the list of grievances may be the tariffs themselves.
Under the U.S. trade laws on manipulation, "remedial action" can be taken after a year of "enhanced bilateral engagement" to address undervaluation, but they do not lay out a clear path to raising tariffs as a response.
The Trump administration has already short-circuited the process by imposing and threatening tariffs under Section 232 of the Trade Expansion Act of 1962, citing national security, and Section 301 of the Trade Act of 1974 in response to intellectual property rights (IPR) violations.
China has protested the moves as lacking legal basis, but they may have made it pointless to pursue the longer process of imposing penalties under currency manipulation statutes.
A more pressing question
A more pressing question for China is how low it can afford the yuan to go before it has to launch a new battle against capital flight and loss of hard currency reserves.
In early July, the pace of depreciation prompted reports that China would mount a defense against letting the yuan fall below the level of 6.7 to the dollar, reawakening fears of a sudden drop like the shock devaluation of August 2015.
By mid-July, the currency was trading below the 6.7-yuan level, breaking through barriers last seen in August 2017. On July 31, CFETS set the central parity rate at 6.8165 to the dollar, hitting daily trading levels of May 2017.
Late Friday, the PBOC announced a measure aimed at slowing the slide. The bank will put a 20-percent reserve requirement on financial institutions for trading "some" foreign exchange forward contracts, Xinhua reported.
The move effectively raises the cost of short-selling the yuan, Bloomberg said, citing capital flight fears and the delicate balance that the bank is trying to maintain.
"Carrying out a controlled depreciation is one of the most difficult maneuvers a central bank can pull off," said Brad Setser, a senior fellow at the Council on Foreign Relations, speaking earlier to The New York Times.
"China, through using capital controls and its reserves, could pull it off again, but there is a risk that a weaker currency is taken as evidence that China can't assure financial stability," Setser said.