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8 | THURSDAY, AUGUST 8, 2019 THE NEW YORK TIMES INTERNATIONAL EDITION
business
tremely irresponsible,” the paper said.
The Global Times, known for its blunt-
ness, said “Trump’s capricious adminis-
tration could push things too far, which
would lead to severe consequences the
U.S. never anticipated.”
Mr. Xi is staking out a strategy that, in
many ways, echoes his American coun-
terpart.
Both hold power as a result of the
crumbling of the liberal globalization
agenda. Both men rely on a political
base that responds to nationalism.
Mr. Xi also appears to have a team of
hard-liners around him, including the
minister of commerce, Zhong Shan, who
was recently added to the Chinese trade
negotiating team.
“For now, Xi is signaling that he is a
tough nationalist who will not back
down in the face of very aggressive be-
havior on the part of the Trump adminis-
tration,” said Victor Shih, an associate
professor at the University of California,
San Diego, and an expert on the Chinese
economy.
Mr. Xi probably believes he can out-
last Mr. Trump. Mr. Xi has amassed
more power than any Chinese leader
since Mao, having abolished term limits.
“In terms of regime legitimacy, this
helps Xi’s hold on power,” said Arthur
Kroeber, managing director of Gavekal
Dragonomics, an independent eco-
nomic research firm.
But his strategy is not without risks. If
China’s economy sours, it could erode
his authority and empower his political
rivals.
Should China fully weaponize its cur-
rency, its economy could take a hit. But
he has hinted that the country could ride
that out. The ideology of the Communist
Party has long espoused suffering for
long-term gains.
In May, when trade negotiations sud-
denly fell apart, Mr. Xi traveled to hal-
lowed revolutionary ground in Jiangxi
Province, the starting point of the Long
March, a period of hardship for the Com-
munist Party in the 1930s that resulted
in victory more than a decade later. He
exhorted the Chinese people to start a
new Long March.
Now Mr. Xi is not merely exhorting,
he is demanding such an approach in the
current economy, Mr. Shi said.
Growth is at its lowest pace in three
decades. There are indications that the
situation will get worse before it gets
better. Beijing has opened up the money
spigots to allow for big infrastructure
projects that have temporarily created
economic growth and employment.
But to make this happen, China’s debt
has ballooned. Local governments that
are funding these infrastructure
projects are running the highest official
deficits in recent history. Big tax cuts
that were meant to spur economic
growth have left the central government
short of the revenue it needs to help pa-
per over the shortages at the local level.
Consumers, while patriotic, are also
beginning to feel the hardship. For
months ordinary shoppers have faced
big price hikes for basic food staples like
fruit and pork.
Mr. Xi could continue to fight the trade
war despite these economic fault lines
as long as he can keep a handle on the
country’s foreign exchange reserves.
The last time China let its currency
weaken substantially in 2015, the cen-
tral bank ended up having to spend
about $1 trillion of its reserves, about a
quarter of its holdings, to stabilize the
renminbi.
But Mr. Xi faces a more complicated
situation now, driven largely by his push
to take a bigger place on the global
stage. Mr. Xi wants China to be a domi-
nant technology player. And he has
pushed Chinese-built infrastructure in
many parts of the world.
These Chinese projects require Amer-
ican dollars because the renminbi is not
widely circulated outside of China. Chi-
na’s currency devaluation will tempo-
rarily help it to offset the impact of tar-
iffs on the economy by making the price
of Chinese goods more competitive. But
it will put heavy constraints on Chinese
companies that do business overseas
and have borrowed money in dollars.
“The draining of China’s foreign ex-
change could break China’s current eco-
nomic model of using state-directed
money to finance certain policies,” Mr.
Shih said. “China can print renminbi
endlessly, but it can’t print American
dollars.”
President Xi Jinping of China faces a complicated situation, driven largely by his push to take a bigger place on the global stage. Chinese-built infrastructure projects around the world require American dollars.
ANDY WONG/ASSOCIATED PRESS
Chinese leader takes risky trade strategy
C HINA, FROM PAGE 1
Amber Wang contributed research.
A pillar of China’s economy, the prop-
erty sector, is feeling the squeeze partic-
ularly hard. Sales have been slowing
since late 2017, making it hard to pay for
new projects. At the same time, the gov-
ernment is clamping down on other
ways that property companies raise
money, like through the shadow banking
system.
Property companies have adapted by
effectively turning the commercial ac-
ceptance bills into a currency, according
to interviews and filings from dozens of
property developers and suppliers like
steel companies, design and construc-
tion firms.
Xu Jiang of Zhubo Design, an archi-
tecture and urban planning company in
the southern city of Shenzhen, next door
to Hong Kong, said customers had
started to pay with commercial accept-
ance bills two years ago. The customers,
which include some of the country’s big-
gest developers, local governments and
state-owned companies, now use these
notes more frequently than paying cash,
he said.
“When developers first started to pay
me with commercial acceptance bills, I
found it difficult to accept,” said Mr. Xu,
the chief operating officer of Zhubo. “I
didn’t know who would pay me and the
debt is still on me.”
“But if I didn’t accept it, I couldn’t get
the money,” he said of his clients. “We
suppliers were forced to become part of
their financial chain.”
Bigger companies like Zhubo say they
can deal with the cash shortage for now.
They can negotiate to get interest on top
of the amount due. They can sell i.o.u.s
to investors for less than face value.
For smaller companies, Mr. Xu said, it
is much harder to wait for months before
being paid. Many property companies
have not survived the shift. Through
July, 281 had declared bankruptcy this
year, according to court filings. About
200 declared bankruptcy over the same
period last year.
Today, one of the biggest issuers of
i.o.u.s is China’s largest and best known
property company, Evergrande. By the
end of last year it had issued nearly $
billion worth of i.o.u.s to its suppliers.
With a towering $100 billion debt pile
and a penchant for raising bonds to pay
off the interest, it appears to have
turned to commercial acceptance bills to
help cover costs.
“Commercial acceptance bills are
only a tiny part of the whole payment,”
said Chen Zhaohua, a spokesman for
Evergrande. He added that it was a form
of payment “agreed by both parties of a
transaction.”
Bauing Construction Holding Group,
a big supplier of design and materials to
China’s biggest property developers,
has disclosed that it is owed $96.4 mil-
lion in these i.o.u.s from Evergrande. It
also recently disclosed a long list of
other companies that owe it money in
the form of similar notes. Gao Sheng, a
spokesman for Bauing, declined to com-
ment.
Another major property developer,
Greenland Holding, which was founded
by the Shanghai government and has
property developments in dozens of cit-
ies across China, had $550 million worth
of unpaid notes out to suppliers by the
end of last year, according to its annual
report. The company said that was 10
times the amount it had outstanding in
2017.
Greenland did not respond to a re-
quest for comment.
One state-owned conglomerate,
China Resources, which is involved in
everything from construction to health
care, has doubled its issuance of i.o.u.s,
with $2.7 billion in slips of paper unpaid
at the end of last year. The company did
not respond to a request for comment.
The boom is worrying some Chinese
regulators. At least one property devel-
oper and five suppliers to property de-
velopers have received inquiries from
exchanges where their stocks are pub-
licly listed, raising concern over the sud-
den increase in these commercial ac-
ceptances, according to corporate fil-
ings.
In response to one such inquiry, Rise-
Sun Real Estate Development, a large
developer that has come into trouble
overseas over its plans, disclosed that it
had increased the use of commercial ac-
ceptance notes and bankers accept-
ances, a similar note but backed by
banks, by more than 13 times. At the
time it owed $460 million of commercial
acceptances to its partners and suppli-
ers.
Xue Ze, a spokeswoman for RiseSun,
declined to comment.
Smaller business owners like Mr.
Zhang, the architect, know the gut-
punch feeling that comes when compa-
nies do not make good on their commer-
cial acceptances. Mr. Zhang recently
took an unpaid i.o.u. to the developer’s
bank.
“We were told by the bank that the
company had moved its money out,” he
said.
Where
companies
use i.o.u.s to
stay afloat
I .O.U., FROM PAGE 7
“If I didn’t accept it, I couldn’t get
the money. We suppliers were
forced to become part of their
financial chain.”
The Trump administration labeled
China a currency manipulator this
week, after China allowed the value of
its currency to weaken.
The designation — which the United
States last used against China in 1994 —
is more a symbolic move than a substan-
tive one. But it dials up the pressure in a
trade war that has rapidly escalated,
harming businesses, consumers and
others that depend on steady relations
between the world’s two largest econo-
mies.
“The trade war has now become a
currency war,” said C. Fred Bergsten,
the director emeritus of the Peterson In-
stitute for International Economics.
“And the Chinese are undoubtedly going
to take further action.”
Here’s a look at what the label means,
and how it could affect the United
States-China relationship.
WHAT IS CURRENCY MANIPULATION?
The relative value of currencies can
make a lot of difference when countries
buy and sell their goods abroad.
When the value of the dollar is strong,
Americans have more purchasing
power abroad, but American exports
are also relatively more expensive for
other countries to purchase. When the
dollar is weaker, it buys fewer imported
goods but makes American exports rel-
atively cheaper for foreign buyers,
which spurs exports.
Some countries try to game the sys-
tem, weakening their currencies to lift
exports. Among those countries is
China, which held down the value of its
currency in the past to speed its eco-
nomic development.
That and other policies helped China
build a manufacturing sector that em-
ploys tens of millions of people and
serves as a factory to the world. But
economists estimate that China’s eco-
nomic transformation has led to the dis-
appearance of at least a million Ameri-
can manufacturing jobs — and perhaps
paved Donald J. Trump’s path to the
presidency.
Currency manipulation will also mat-
ter in the trade war, as President Trump
ratchets up tariffs on Chinese goods. A
cheaper Chinese currency helps Beijing
offset much of the pain of American tar-
iffs, which otherwise would make Chi-
nese goods considerably more expen-
sive in the United States.
IS IT OCCURRING NOW?
Most economists agree that China ma-
nipulated its currency, with negative ef-
fects for the United States, for long peri-
ods from roughly 2003 to 2013. But some
are arguing against the Trump adminis-
tration’s move to label China a currency
manipulator now.
In an announcement on Monday, the
United States Treasury Department
said China had “a long history of facili-
tating an undervalued currency” and
had taken “concrete steps to devalue its
currency,” the renminbi, in recent days
to gain an unfair competitive advantage.
China did allow the value of its cur-
rency to fall on Sunday, when the ex-
change rate weakened past 7 renminbi
to the dollar for the first time since 2008.
The Chinese central bank likely would
not have made such a move without a
go-ahead from top government officials.
But the move appears to be in line
with market forces. (More on that be-
low.) And it doesn’t appear to satisfy the
Trump administration’s own guidelines.
Twice a year, the Treasury Depart-
ment puts out a report that analyzes
whether countries are manipulating
their currencies. In the most recent re-
port in May, the department criticized
China’s practices but said China met
only one of several criteria for determin-
ing whether a country was a manipula-
tor.
The Treasury Department said Chi-
na’s trade surplus with the United States
had far exceeded its threshold. But
China did not meet other requirements,
including sustained intervention in its
currency market.
Technically, a country does not need
to satisfy all those criteria before the
United States can label it a currency ma-
nipulator. But to some trade experts, the
report undercuts the Trump administra-
tion’s claim.
Eswar Prasad, a former head of the
International Monetary Fund’s China
Division, said the administration was
applying the label in an “arbitrary and
clearly retaliatory manner.” In a report
released in July, the I.M.F. also found
that China’s currency was broadly
where it should be.
“The currency manipulation charge
against China is difficult to support on
the basis of objective criteria,” Mr.
Prasad said.
CAN CHINA CONTROL ITS CURRENCY?
The United States and many other de-
veloped economies let the market deter-
mine the value of their currencies, and
typically influence that value only indi-
rectly. For example, when the Federal
Reserve raises or lowers interest rates,
it can strengthen or weaken the dollar.
China manages its currency more ac-
tively, though the market still plays a
role. Officials set a daily benchmark ex-
change rate for the renminbi, but allow
traders to push the value up or down
within a set range. Officials then use
that trading activity to help determine
the next day’s exchange rate, though
they disclose few details about how that
process works.
Recently, those market forces have
been pushing the value of the renminbi
down, as a weaker Chinese economy
and Mr. Trump’s tariffs encourage in-
vestors to sell the currency.
Brad Setser, a senior fellow for inter-
national economics at the Council on
Foreign Relations, said China had been
resisting market pressures on its cur-
rency for much of this year. China has
been reluctant to have the value of the
renminbi fall too far or too fast, for fear
of sparking a mass sell-off.
So the Chinese government has
turned to its vast foreign exchange re-
serves, accumulated through years of
China’s exporting more products than it
imported. Beijing has used the dollars in
the reserve to purchase renminbi and
prop up its value, Mr. Setser said.
Until recently, that is. On Monday,
Chinese officials let the renminbi weak-
en to the lowest level in over a decade.
On Tuesday, they set the exchange rate
at a level that was weaker than Monday
but nonetheless stronger than most ana-
lysts had expected.
WHAT IF THE LABEL STICKS?
Mainly, China must negotiate how to
make its currency more fairly valued
with the United States and the Interna-
tional Monetary Fund, which governs
the few international guidelines that
have been established on currency.
Since the I.M.F. just determined that
China’s currency was fairly valued,
those negotiations don’t seem likely to
go far.
But the designation is likely to rankle
Chinese officials, who have been very
resistant to being labeled a currency
manipulator, said Tony Fratto, a partner
at Hamilton Place Strategies and a for-
mer Treasury Department official.
And if China’s recent depreciation is
the start of a trend, it could have much
bigger implications for the world econ-
omy.
A cheaper renminbi would harm
American exporters to China and erode
the effectiveness of Mr. Trump’s tariffs
on Chinese exports to the United States.
It would also hurt exporters in Europe,
Japan and elsewhere. And it could cre-
ate market pressures for South Korea,
Taiwan and others that compete in simi-
lar industries to devalue their curren-
cies, potentially disrupting trade and in-
vestment flows.
Mr. Trump could also use the label to
justify further actions on China, includ-
ing perhaps higher tariffs.
Stephanie Segal, a senior fellow at the
Center for Strategic and International
Studies, said the actions on currency
“have ushered in a new stage in the U.S.-
China trade war that risks spinning out
of control.”
“China’s willingness to allow the cur-
rency to depreciate was likely intended
to remind the president of the down-
sides of escalating actions,” she said. “If
that was the idea, it didn’t have the de-
sired effect.”
U.S. calls Beijing a currency manipulator. What does it mean?
Jeanna Smialek, Keith Bradsher and Al-
exandra Stevenson contributed report-
ing.
Counting money in Hai’an, China. Chinese officials set a daily benchmark exchange rate
for the renminbi, but allow traders to push the value up or down within a set range.
CHINATOPIX, VIA ASSOCIATED PRESS
Latest trade war tactic
likely to anger China,
but it is mainly symbolic
BY ANA SWANSON
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