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Treasury Finds No Currency Manipulation in Most Recent Report

The U.S. Treasury Department’s semi-annual foreign exchange rate report does not list any U.S. trading partner as a currency manipulator and maintains six countries on a list of those targeted for close scrutiny of their currency practices. Mainland China met only one of the criteria but remains on the list because it accounted for “a large and disproportionate share” of the overall U.S. trade deficit.

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 and Germany each met two of these three criteria. India and Switzerland only met one criterion each and will be removed from the monitoring list in the next report if such remains the case during the current six-month period. Mainland China also met only one of the criteria but remains on the list because it accounted for “a large and disproportionate share” of the overall U.S. trade deficit.

In addition, Treasury has determined that during the first half of 2018 no major U.S. trading partner met 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 country. If that country 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 the Office of the U.S. Trade Representative 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 could waive the remedial action requirement under specified circumstances.

The report notes that the mainland Chinese currency has fallen notably in recent months, down by seven percent against the U.S. dollar since mid-June. The majority of the depreciation against the dollar occurred between mid-June and mid-August; from mid-August through end-September the RMB remained within a relatively narrow range of 6.8-6.9 to the U.S. dollar. The report asserts that this depreciation “will likely exacerbate China’s large bilateral trade surplus with the United States, as well as its overall trade surplus.”

Then again, Treasury estimates that direct intervention by the People’s Bank of China has been limited this year. According to the report, since the summer mainland Chinese authorities have reportedly employed limited tools to stem depreciation pressures, including implementing administrative measures and influencing daily central parity exchange rate levels. The report adds that broader proxies for intervention indicate there have been modest foreign exchange sales recently by state banks, helping stem depreciation pressures, although it is clear for Treasury that mainland China is not resisting depreciation through intervention as it had in the recent past.

Treasury continues to urge mainland China to enhance the transparency of its exchange rate and reserve management operations and goals and is “deeply disappointed” that Beijing continues to refrain from disclosing its foreign exchange intervention. Finally, to enhance the sustainability of both mainland Chinese and global growth, Treasury continues to believe mainland China needs to aggressively advance reforms that support greater household consumption growth and rebalance the economy away from investment.

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