China’s latest moves to manage the yuan add fuel to Trump’s threats

With Donald Trump less than two weeks from taking office, China's central bank continues to prop up the value of the yuan without success, adding fuel to the president-elect's threat to punish China for manipulating its currency.

"The drama being played out in the currency market reads like a Hollywood script," Carl Weinberg, chief economist at High Frequency Economics, wrote in a note to clients Monday.

Trump has threatened to slap tariffs on Chinese goods sold in America unless the U.S. gets a "better deal" with Beijing, including a reversal in the recent slide in the value of the yuan. A weaker Chinese currency has the effect of making Chinese goods more competitive in global markets.

There seems to be little doubt that China in recent weeks has been trying to manipulate its currency. But the moves are apparently aimed at strengthening the yuan, not weakening it.

Though a weaker local currency may help Chinese exporters, it has also sparked a wave of capital flight out of the country that Chinese officials have been struggling to contain.

To push for a "better deal," Trump has pledged to label China a "currency manipulator," a presidential declaration that would set in motion negotiations by the U.S. Treasury Department with the offending country.

While Trump has pledged to make that declaration on "day one," it's not clear that his choice for Treasury secretary, Steven Mnuchin, will be confirmed by the inauguration on Jan. 20. Even if confirmed, it's also not clear exactly what the Treasury would ask China's central bank to do, given that it has already begin intervening to support the yuan.

Among those efforts, the People's Bank of China has been spending down its cash hoard of foreign exchange to prop up its currency. Fresh data this weekend showed that the value of China's foreign exchange reserves fell by 10 percent last year, to just more than $3 trillion.

The report follows a series of moves by Chinese central bankers over the last few weeks to intervene shore up the value of the yuan. Those include boosting short-term interest rates and tightening controls on how much money Chinese individuals can move out of the country

Beginning Jan. 1, China imposed tighter oversight of foreign currency purchases and tougher penalties for illegal money outflows.

The annual purchase of foreign currencies will remain capped at $50,000. Individual Chinese investors who want to buy foreign currencies at banks will have to fill out an application and explain the purpose of the transaction.

Despite the central bank moves, the value of the yuan lost roughly 7 percent of its value against the dollar last year.

Many analysts expect that slide to continue.

"It's an open question how much (the Chinese currency) will have to drop before market pressure dissipates but it is probably closer to that point today than it was a year ago," according to Mark Williams, chief China economist for Capital Economics.

That downward pressure comes as the Chinese economy continues to slow and investors and companies move capital out of the country.

Meanwhile, investors looking for bigger returns have been flocking to the U.S. dollar, pushing it higher against the rest of the world's currencies. While central banks in Europe and Japan continue to suppress interest rates, the U.S. Federal Reserve has begun raising rates, which make dollar-denominated assets more attractive.