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China's chances of being called a 'currency manipulator' appear to have just dropped

Treasury Secretary Steven Mnuchin believes in procedure. That's a good thing for China.

Mnuchin said on Thursday that the Trump administration will stick to existing processes on judging whether China manipulates its currency to gain unfair trade advantages. By those criteria, however, China does not match the U.S. definition of a currency manipulator.

"We have a process within Treasury where we go through and look at currency manipulation across the board," Mnuchin said on CNBC's "Squawk Box." "And we'll go through that process," he said. "We'll do that as we have in the past, and we're not making any judgments until we continue that process."

President Donald Trump repeatedly said during his presidential campaign that he would declare China a currency manipulator — on his first day in office, he said — for artificially weakening the yuan against the dollar. A cheap currency brings down the prices of a country's exports, automatically making them more competitive.

But like President Barack Obama, Trump as president has so far backed away from slapping that label on China.

In the Treasury's most recent review in October, China met only one of three criteria set down by the United States before it can label the communist country a currency manipulator.

Those criteria are:

  1. Match: A "significant" bilateral trade surplus with the U.S. larger than $20 billion, meaning the country exports far more to the U.S. than it imports.

    — China had a goods trade surplus far beyond that, of $347 billion in 2016, according to the U.S. Census Bureau.
  2. No match: A "material" current account surplus above 3 percent of gross domestic product, meaning national savings far exceed investments.

    — China's current account surplus fell from 2.7 percent of GDP in 2015 to 1.9 percent of GDP in 2016, according to a Feb. 8 Reuters report citing official Chinese data.
  3. No match: "Persistent, one-sided intervention" in the currency market, including repeated purchases of foreign currency (which drives up other currencies and drives down local currencies).

    — China sold a record $188 billion in dollar-denominated U.S. Treasurys last year, according to news service StreetAccount. China's own foreign exchange reserves have dropped $1 trillion in two-and-a-half years.

The yuan fell 7 percent against the dollar in 2016. It has strengthened about 1 percent in the first two months of this year.

The People's Bank of China has been aggressively selling U.S. dollars in an attempt to prevent the yuan from weakening too much. Beijing has tried to defend a level of seven yuan versus the dollar. The yuan mid-point fix on Thursday was 6.8695 against the greenback.

"China clearly fails to meet the latter two criteria" set by the Treasury, David Lubin, head of emerging markets economics at Citi, said in a Feb. 14 note.

Still, a trade war between the U.S. and China could still happen without declaring China a currency manipulator, Lubin said. "The U.S. Treasury could also change the definition of the benchmarks that would allow labeling China a manipulator, too, if it so chose," he added.