Treasury Releases FX Manipulation Report: Says China Must Allow Yuan To “Rise With Market Forces”
While Donald Trump already spoiled the surprise of the contents of the latest semiannual report from the Treasury on currency manipulation, when on Wednesday he told the WSJ that China would not be named a currency manipulator, moments ago the US Treasury confirmed just that when it published the long awaited report on “Foreign Exchange Policies of Major Trading Partners of the United States” which while keeping the same six countries – China, Japan, Korea, Taiwan, Germany, and Switzerland – on its manipulation monitoring watch list, it said no major trading partner met the criteria to be designated an FX manipulator:
Pursuant to the 2015 Act, Treasury has found in this Report that no major trading partner met all three criteria for the current reporting period. Similarly, based on the analysis in this Report, Treasury also concludes that no major trading partner of the United States met the standards identified in Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) for currency manipulation in the second half of 2016.
This confirms what Trump said previously, when he reverse on his campaign promise, and said China hasn’t manipulated the yuan for months, while accusing unidentified nations of devaluing their currencies and saying the dollar is getting too strong.
That said, while the US declined to label China a currency manipulator, the report appeared to toughen the language involving the world’s second-largest economy , urging Beijing to buy more American goods and services and reduce its trade imbalance, while allowing the Yuan to “rise with market forces.”
According to the report, “China currently has an extremely large and persistent bilateral trade surplus with the United States, which underscores the need for further opening of the Chinese economy to American goods and services, as well as faster reform to rebalance the Chinese economy toward greater household consumption.”
The report also said that China “has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist renminbi (RMB) appreciation even as its trade and current account surpluses soared. China allowed the RMB to strengthen only gradually, so that the RMB’s initial deep undervaluation took an extended period to correct.”
The Treasury then said that the “distortion in the global trading system resulting from China’s currency policy over this period imposed significant and long-lasting hardship on American workers and companies” and came rather close to accusing China of FX manipulation by way of limiting market access in setting the fair value of the currency:
“China continues to pursue a wide array of policies that limit market access for imported goods and services, and maintains a restrictive investment regime which adversely affects foreign investors.” The Treasury also urged “further opening of the Chinese economy to U.S. goods and services as well as faster implementation of reforms to rebalance the Chinese economy toward greater household consumption would aid in reducing the bilateral imbalance.”
In a notable departure from previous reports, the latest version said that to remain on the Treasury’s good side, China has to “demonstrate that its lack of intervention to resist appreciation over the last three years represents a durable policy shift by letting the RMB rise with market forces once appreciation pressures resume.” That, of course, is the key highlight because as Beijing is all too aware, over the past three years China has burned nearly $1 trillion in reserves to prevent the Yuan from depreciating too rapidly, and to keep the pace of capital outflows from rising too high.
As Bloomberg further notes, like the last report by the Obama administration in October, China met only one of the three criteria – for having a large trade deficit – that’s used by the Treasury as a threshold for manipulation. China’s $347 billion goods trade surplus with the U.S. in 2016 was the largest of major trading partners last year, according to the report, which also observed that the surplus “has also declined by only 5 percent in 2016 from its peak in 2015.”
Going back to previous boilerplate language, the report also said that the “Treasury will be scrutinizing China’s trade and currency practices very closely, especially in light of the extremely sizable bilateral trade surplus that China has with the United States” and that it “places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and not to target China’s exchange rate for competitive purposes.”
It concludes by stating that “Treasury also places high importance on greater transparency of China’s exchange rate and reserve management operations and goals.” Oddly enough, investors, economists and pundits who obsess over China’s economy, and respond to every goalseeked wiggle in its “data” are far less worried about the “data” that comes out of Beijing.
Aside from China, Taiwan also met one manipulation condition, while the other four met two. Some of the additional highlights via Bloomberg:
- The U.S. will watch South Korea FX closely, with the Treasury urging more flexibility; The US estimates S. Korea was a net FX seller in 2016 of $6.6 billion, or 0.5% of GDP
- Taiwan was urged to limit intervention to disorderly markets
- Stronger German domestic demand would underpin euro
- Regarding Switzerland, the TSY said Swiss interventions should be more transparent
Finally, the report said that “the United States cannot and will not bear the burden of an international trading system that unfairly disadvantages our exports and unfairly advantages the exports of our trading partners through artificially distorted exchange rates.”
And while the Treasury said it was “committed to aggressively and vigilantly monitoring and combating unfair currency practices” it has yet to demonstrate the latter.
* * *
Full Treasury report below (link)