If US President-elect Donald Trump stands by his promise to label China a "currency manipulator" on his first day in office, then he will have to do so in defiance of mainstream economic analysis, as well as advice of his own Treasury department.
And in an added twist, if Chinese policymakers were to stop intervening, the renminbi would go down rather than up, economists say.
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"The simple answer is 'no'," ANZ's Singapore-based head of Asia research, Khoon Goh, said. "Based on the current criteria that the US Treasury has set out, China is not a currency manipulator."
Only this week the Treasury Department's semi-annual report to Congress found that "no economy satisfied all three criteria" that would constitute "unfair currency practices".
That trio of factors, only formalised following the passing of the Trade Facilitation and Trade Enforcement Act of late 2015, assess whether a country has a "significant" bilateral trade surplus with the US, a "material" current account surplus, and is engaged in "persistent one‐sided intervention in the foreign exchange market". US officials judge China to satisfy the first criterion, but not the others.
'Outdated accusation'
That's not to say that China hasn't manipulated its currency in the past.
"China for a long time did hold down the value of its currency," Capital Economics China economist Julian Evans-Pritchard said. "A few years ago it wouldn't have been a totally unfair accusation, but a lot has changed."
"It's a bit of an outdated accusation now," he said.
According to research by Mr Goh, you would have to go back to the period between the end of 2004 and mid-2011 for Mr Trump's focus on China's foreign exchange practices to be a valid one, as per the US Treasury framework.
The renminbi fell to its lowest level in nearly eight years on Tuesday, breaking through 6.85 per US dollar. That continues a trend that began in early 2014 and which has since resulted in a 15 per cent drop in the value of the currency.
Still, that has merely brought it closer to fair value after a period of excessive strength, economists say. While the Chinese currency has been weakening against the greenback as well as against China's major trading partners, the Chinese currency is still 21 per cent stronger than the dollar since December 2005, and 38 per cent stronger on a real, trade‐weighted basis, the US Treasury officials calculated.
"If you look back a year ago I can say with great certainty that [the renminbi] was definitely overvalued," Mr Goh said. Now it looks more reasonably valued, he said, a view shared by the International Monetary Fund.
Illogical label
Importantly, that steady weakening in the renminbi is despite Chinese intervention, rather than a result of it.
"It doesn't make much sense to label China a currency manipulator at the moment because it's actually intervening in the other direction by selling significant amounts of foreign currency in order to prevent the currency from falling too rapidly," Mr Evans-Pritchard said – a fact also highlighted in this week's Treasury report.
"That's the ironic thing," Mr Goh said. "If US authorities want China to completely stop intervening, they are not going to get a stronger renminbi, they are going to get a much weaker one."
"It's a case of be careful what you wish for."
Nevertheless, Mr Evans-Pritchard said he "wouldn't be surprised" if Trump defied the facts and went ahead and labelled China a currency manipulator anyway on his first day in office, January 20, thereby fulfilling a campaign promise.
"It would be relatively easy for them to do, quite an easy win, and a way for them to follow through on their campaign pledges," Mr Evans-Pritchard said.
'Nothing would change'
"Nothing would really change on the ground," as a result of labelling the country a manipulator, Mr Evans-Pritchard said, noting that the only legal ramification of such a statement would be for US Treasury officials to meet with their Chinese counterparts to discuss the situation – which would happen anyway.
"I imagine the Chinese will complain about it but not necessarily take any specific actions unless the US does," he said.
"What we are worried about if Trump goes further," Mr Evans-Pritchard said, alluding to promises Mr Trump made during the campaign to put a 45 per cent tariff on Chinese imports, which would surely spark a more concrete response from China.
"If he were to do that [impose tariffs] then I don't think China will take it sitting down, and the last thing we need is a trade war between the US and China," Mr Goh said.
Fear of such an event is why Asian currencies and markets have come under sustained pressure since the US election, even as the US equity market and commodities have rallied, Mr Goh said.
"We're hoping that sensible heads will prevail."