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Treasury Again Finds Mainland Chinese Currency Is Not Being Manipulated

According to the Treasury Department’s latest semi-annual report to Congress on international economic and exchange rate policies released on 14 April, neither mainland China nor any other major U.S. trading partner meets the requirements to be designated as a currency manipulator. While Sino-U.S. trade tensions could ease somewhat as a result of this determination, mainland China remains one of six economies Treasury has targeted for close scrutiny of their currency practices.

The Trade Facilitation and Trade Enforcement Act established a process to determine whether a country may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States, engage countries that may be pursuing such policies and impose penalties on those that fail to adopt appropriate policies. The TFTEA requires Treasury to undertake an enhanced analysis of exchange rates and externally-oriented policies for each major trading partner that has a significant bi-lateral trade surplus with the United States (which Treasury has set at greater than US$20 billion) and a material current account surplus (i.e., at least three percent of the country’s gross domestic product) and has engaged in persistent one-sided intervention in the foreign exchange market (i.e., conducted repeated net purchases of foreign currency that amount to at least two percent of its GDP over the year).

Treasury has determined that for the most recent period Japan, South Korea, Germany and Switzerland each met two of these three criteria. Mainland China met only one but accounted for “a disproportionate share” of the overall U.S. trade deficit. Taiwan only met one as well, down from two in the prior report, but has yet to demonstrate “a durable, not one-off, and clear improvement” with respect to the criterion it did not meet this time. As a result, these six economies will remain on Treasury’s monitoring list but no enhanced analysis will be undertaken.

In addition, despite President Trump’s pledge to name mainland China a currency manipulator early in his administration, Treasury has determined that neither mainland China nor any other major U.S. trading partner currently meets the standard of manipulating the rate of exchange between its currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If such a determination were made, Treasury would be required to commence enhanced bi-lateral engagement with that economy. If that economy failed to adopt appropriate policies to correct its undervaluation and external surpluses within a year, the president would be required to take one or more of the following actions: (1) denying access to Overseas Private Investment Corporation financing, (2) excluding the country from U.S. government procurement, (3) calling for heightened surveillance by the International Monetary Fund, and (4) instructing USTR to take such failure into account in assessing whether to enter into a trade agreement or initiate or participate in trade agreement negotiations. The president may waive the remedial action requirement under specified circumstances.

Treasury indicated in its report that mainland 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. Beijing allowed its currency to strengthen only gradually so that the RMB’s initial deep undervaluation took an extended period to correct. According to the report, the distortion in the global trading system resulting from mainland China’s currency policy over this period imposed significant and long-lasting hardship on American workers and companies. Moreover, mainland China allegedly continues to pursue a wide array of policies that limit market access for imported goods and services, and maintains a restrictive investment regime that adversely affects foreign investors.  

Mainland China also currently has an extremely large and persistent bi-lateral trade surplus with the United States, which Treasury believes underscores the need for further opening of the mainland Chinese economy to U.S. goods and services as well as faster reform to rebalance the mainland Chinese economy toward greater household consumption. Mainland China’s goods trade surplus with the United States is at US$347 billion in 2016 by far the largest among any of the United States’ major trading partners. Moreover, the surplus declined by only five percent in 2016 from its peak in 2015.

Treasury observed that in comparison to the extremely large and persistent bi-lateral trade imbalance, mainland China’s multi-lateral external position has undergone greater adjustment in recent years, with its current account surplus having decreased most recently from 2.8 percent of GDP in 2015 to 1.8 percent of GDP in 2016. Additionally, after engaging in one-way, large-scale intervention to resist appreciation of the RMB for a decade, mainland China’s recent intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation that would have negative consequences for the United States, mainland China and the global economy.

Treasury said that it will scrutinise mainland China’s trade and currency practices very closely, especially in light of the extremely sizable bi-lateral trade surplus that the mainland has with the United States. U.S. officials are looking for Beijing 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. Of significant importance for U.S. authorities is mainland China’s adherence to its G-20 commitments to refrain from engaging in competitive devaluation and not to target its exchange rate for competitive purposes. At the same time, the U.S. government would like to see greater transparency in mainland China’s exchange rate and reserve management operations and goals.

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