A few years ago, China’s currency seemed to be rising inexorably to global dominance. The renminbi had become the fifth most important currency for international payments, and in 2016, the International Monetary Fund (IMF) included it in the basket of major currencies that determines the value of Special Drawing Rights (the IMF’s global reserve asset). Since then, however, the renminbi’s progress has stalled.

COVID-19 hit the Chinese economy hard in the first quarter of 2020, causing real gross domestic product (GDP) to contract by 6.8 percent year on year. But since the city of Wuhan emerged from lockdown in early April, the economy has gradually returned to normal, and grew by 3.2 percent in the second quarter. According to the consensus view, China’s current potential GDP growth rate is six percent.

In early August, the renminbi’s exchange rate broke through the psychological threshold of CN¥7 per United States (US) dollar. While investors were still digesting the full significance of this event, US President Donald Trump’s administration startled the market by labelling China a “currency manipulator.”The designation is absurd, to say the least, because China doesn’t meet the US government’s own criteria for being a currency manipulator.