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Trump wants to punish China for its currency practices. He should be thanking them.

China isn’t holding down the value of its currency anymore — it’s propping it up.

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Donald Trump has decided to go at it with China once again: During an interview with Reuters Thursday, the president declared the country the “grand champions” of currency manipulation. It’s a combative stance that’s at odds with a statement Treasury Secretary Steven Mnuchin made just hours before Trump’s interview. It’s also based on a view of China’s currency practices that’s entirely outdated.

Trump’s insistence that China is deliberately suppressing the value of its currency to boost its exports threatens to add new fuel to simmering tensions with Beijing.

In the run-up to entering the White House, Trump threatened to refuse to honor the “One China” policy that has kept ties between the two world powers on an even keel since 1979. And during his confirmation hearing, Secretary of State Rex Tillerson described confronting China in the South China Sea in a manner that some in Beijing interpreted as an invitation to war.

But things had been on the mend as of late. After prolonged silence between the two countries, Trump had an affable phone call with Chinese President Xi Jinping, and during that call he conceded on One China by agreeing to observe the policy.

But Trump’s new allegations that China is trying to game the system to give itself an edge in global trade could ratchet tensions right back up.

"Well they, I think they're grand champions at manipulation of currency. So I haven't held back," Trump said during the interview with Reuters. "We'll see what happens."

China shot back swiftly, denying that it has intentionally held down the value of its currency. In fact, a Chinese foreign ministry spokesperson sounded a rather Trumpian note of triumphalism in his response: “If you must pin the label of ‘grand champion’ … on China, then we are a grand champion of economic development,” Geng Shuang said in an interview with the Guardian.

As with other major foreign policy issues, Trump’s own administration is divided about China’s currency practices. Mnuchin, Trump’s Treasury secretary, said hours earlier that he wasn’t prepared to conclude that China was suppressing the value of the yuan.

"We have a process within Treasury where we go through and look at currency manipulation across the board. We'll go through that process. We'll do that as we have in the past," Mnuchin said during an interview with CNBC. "We're not making any judgments until we go continue that process." That currency report won’t be out until April.

That’s a long time from when Trump had originally pledged to deem China a currency manipulator: His first day in office. At this point it’s difficult to discern what will happen come April. What is clear is that Trump’s bark doesn’t necessarily match his bite when it comes to Beijing.

Formally labeling a country like China a currency manipulator would be a big deal. It would require the Treasury Department to open negotiations with the targeted government to try to get the country to change its currency and trade practices. If a satisfactory solution isn’t reached, the US government has license to impose tariffs on the accused nation, which are new taxes on the goods that it exports to the US. That in turn could be the opening salvo of a trade war between the countries.

China manipulates its currency — but right now that’s a good thing

Part of what Trump said is right — Beijing’s central bank actively does try to move the value of Chinese currency, the renminbi, by buying or selling foreign currencies.

That’s in contrast to many advanced economies like the US, which have a floating exchange rate, where the price of the currency is largely determined by supply and demand for it relative to other currencies (although it can be influenced by other factors as well, like a country’s macroeconomic policies).

But Trump’s concern about how China manipulates its currency is entirely outdated. China spent decades suppressing the renminbi’s value to keep the country’s colossal export machine competitive. It bought up tons of foreign currency, mainly dollars, in order to keep its own currency lower, accumulating $4 trillion worth of foreign exchange reserves by 2014. (When you buy a ton of currency, its value appreciates, and your own currency depreciates relative to it.)

By keeping the renminbi’s value low, China ensured that its goods remained inexpensive in global markets — and made foreign imports into China more expensive.

But China’s growth is slowing, foreign investors are pulling out of the country, and now the pressure on the renminbi is going the other way: In the past two years, Beijing hasn't been suppressing their currency — it has been intervening in order to prop the currency up. China’s foreign reserve has dropped from $4 trillion to $3 trillion in just the past two years as they’ve sold off foreign currency to keep the renminbi from depreciating too swiftly.

“If anything, we should be thanking the Chinese lately,” says Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. China is actively working to make sure its currency doesn’t fall further, which is good for US exports.

China is no longer doing what Trump alleges — it’s doing the opposite. Trump has a number of things he could take up with China to make American trade with the country more competitive, like pushing for more stringent worker standards there. But right now he appears to be eager for a fight over an issue that’s become obsolete.

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