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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 29 April, neither mainland China nor any other major trading partner meets the requirements to be designated as a currency manipulator. Treasury also determined that five major U.S. trading partners – mainland China, Japan, South Korea, Taiwan and Germany – met two of the three criteria for enhanced analysis provided under the Trade Facilitation and Trade Enforcement Act of 2015. However, none of these economies has been included in a newly-created monitoring list because they do not currently meet all three criteria.

The Trade Facilitation and Trade Enforcement Act of 2015 requires Treasury to undertake an enhanced analysis of exchange rates and externally-oriented policies for each major trading partner that has (i) a significant bi-lateral trade surplus with the United States, (ii) a material current account surplus, and (iii) engaged in persistent one-sided intervention in the foreign exchange market. Drawing on economic research and data analysis, Treasury has determined the following thresholds for these criteria.

  • an economy has a significant trade surplus with the United States if its bi-lateral trade surplus is larger than US$20 billion (roughly 0.1 percent of U.S. gross domestic product), which captures around 80 percent of the value of all trade surpluses with the United States last year
  • an economy has a material current account surplus if its surplus is larger than three percent of that economy’s GDP
  • an economy has engaged in persistent one-sided intervention in the foreign exchange market if it has conducted repeated net purchases of foreign currency that amount to more than two percent of its GDP over the year

Mainland China, Japan, Germany and South Korea were identified in the report as a result of a material current account surplus combined with a significant bi-lateral trade surplus with the United States, while Taiwan was identified as a result of its material current account surplus and its persistent, one-sided intervention in foreign exchange markets. Treasury indicates that the current thresholds are relatively robust in that reasonable changes to the thresholds do not materially change the report’s conclusions. The agency will continue to review the factors it uses to assess these criteria to ensure that the new reporting and monitoring tools provided under the Act meet the objective of indicating where unfair currency practices may be emerging.

Should an economy meet all three criteria, the president, through the secretary of the Treasury, is required to commence enhanced bi-lateral engagement with that economy. If one year after the start of enhanced bi-lateral engagement the secretary of Treasury determines that the economy has failed to adopt appropriate policies to correct its undervaluation and external surpluses, the president is required to take one or more of the following actions: (i) denying access to Overseas Private Investment Corporation financing; (ii) excluding the economy from U.S. government procurement; (iii) calling for heightened surveillance by the International Monetary Fund; and (iv) instructing the Office of the U.S. Trade Representative to take into account such failure to adopt appropriate policies 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, however.

According to Treasury, Beijing has intervened heavily in the foreign exchange markets in recent months to support the yuan after strong downward market pressure triggered by a surprise change in mainland China’s foreign exchange policy last August. The report notes that such a depreciation would have had negative consequences for the mainland Chinese and global economies. Treasury believes that more clarity over exchange rate goals and assurances that a devaluation will not be used to support growth would help stabilise the market.

Treasury estimates that from August 2015 through March 2016 mainland China sold more than US$480 billion in foreign currency assets to support the value of the yuan. At the same time, the mainland has a very large and growing bi-lateral goods trade surplus with the United States, underscoring the need for further implementation of structural reforms to rebalance the mainland Chinese economy to household consumption and for consumption-friendly fiscal stimulus to support demand. The report concludes that the yuan should continue to experience real appreciation over the medium-term as core factors that have been supportive of the currency remain in place, including high net savings, strong external balances that include a sizeable and growing current account surplus, and improved terms of trade reflecting lower commodity prices. Treasury adds that Beijing has stressed that the yuan will continue to be a strong currency, given mainland China's current accounts surplus, higher economic growth, large foreign exchange reserves, and stable fiscal and financial conditions.

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