Nothing to See Here: China No Longer 'A Currency Manipulator'
January 14, 2020
The Treasury Department released its semiannual Report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. The report, which notionally is due to Congress each April and October, was the first issued since Treasury designated China a currency manipulator in August 2019. The Treasury Department held back the October 2019 report, as trade negotiations between China and the United States were ongoing; it removed the designation and released the full report on Monday, two days ahead of an anticipated signing of a “Phase One” deal, which will include an agreement on currency.Q1: What led the Treasury Department to drop the “currency manipulator” designation?
A1: The Treasury Department’s August announcement designating China a “currency manipulator” charged China with devaluing its currency to “gain an unfair competitive advantage in international trade.” The August designation was roundly criticized and ran counter to Treasury’s own analysis from the May 2019 report, which estimated China had, on net, intervened to support the renminbi (RMB). Yesterday’s report notes Treasury’s close engagement with China over currency developments since the designation. In a preview of what we can expect to see in the Phase One agreement, Treasury claims, “China has made enforceable commitments to refrain from competitive devaluation and not target its exchange rate for competitive purposes.” Such commitments would be consistent with earlier commitments made by China in the context of the communique released by G20 finance ministers and central bank governors as well as fact sheets issued after past bilateral U.S.-China dialogues. Depending on the exact commitment, agreement by China to publish “information related to exchange rates and external balances,” as mentioned in the report, could improve the transparency of Chinese economic data.
The Treasury Department also notes the recent appreciation of the RMB—which coincided with the announcement of a Phase One agreement—as a factor in removing the designation. And just as the August announcement specified that the currency manipulator designation came “under the auspices of President Trump,” it’s safe to assume the designation’s removal also came with a presidential seal of approval.
Q2: What does the report say about global currency trends and related financial sector issues?
A2: In recent years, the Treasury Department has sought to boost transparency of other countries’ economic data, including currency-related data. Treasury’s report touts commitments in the United States-Mexico-Canada Agreement (USMCA) to avoid unfair currency practices and publish economic information. It welcomes South Korea’s publication of foreign exchange intervention data—the central bank’s buying and selling of foreign currency—for the first time starting last March. The report also welcomes the commitment by Singapore—an economy with one of the world’s largest current account surpluses at nearly 18 percent of GDP—to begin publishing intervention data starting this year.
At present, the strong dollar arguably masks the importance of such commitments. Countries that historically have intervened to weaken their currencies have had less need to do so because of the relatively stronger growth outlook in the United States and financial markets’ seemingly insatiable demand for dollar assets. However, Treasury’s report cautions that “continued dollar strength is concerning,” while a weaker dollar might tempt U.S. trading partners to intervene in exchange markets to keep their currencies down, making reporting of intervention data more critical.
In addition, this report indicates that the Treasury Department is looking beyond traditional central bank intervention to understand how country authorities may seek to influence the exchange rate. New since the May report, Treasury calls on China to “increase public understanding of the relationship between the PBOC (China’s central bank) and the foreign exchange activities of the state-owned banks, including in the off-shore RMB market.” This statement makes clear that exchange rates are impacted by more than direct central bank interventions in foreign exchange markets and suggests that transparency needs to extend beyond the publication of such data. Similarly, the report includes a footnote expressing “concern” that “Taiwan may have engaged in substantial undisclosed foreign exchange intervention in the swap market.”
Q3: How are other economies discussed in the report?
A3: As with other foreign exchange reports issued since the passage of the Trade Facilitation and Trade Enforcement Act of 2015, no major trading partner other than China was found in the latest report to be manipulating its currency. The 2015 Act requires an assessment of the largest trading partners of the United States against three quantified thresholds: trade balance with the United States, overall current account deficit, and foreign exchange intervention. No economy breached the threshold for all three metrics. (The August 2019 designation of China as a manipulator was based not on the 2015 Act but on the more subjective standards in Section 3004 of an earlier 1988 Act governing currency matters.)
However, the Treasury Department once again put several economies that breached two of the three 2015 thresholds on a “Monitoring List”: China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia, Vietnam, and Switzerland. Of these economies, only Switzerland represented a new addition in the January report due to its growing trade surplus with the United States. In addition, the report singled out Germany, the Netherlands, and South Korea for providing “inadequate policy support” for growth and calling on each to provide additional fiscal support. Finally, the report notes that Treasury is “continuing to track carefully” several other economies, including Taiwan and Thailand, that are not on the Monitoring List but are “close to triggering key thresholds.”
While the report focuses on the foreign exchange policies of U.S. trading partners, it also includes data on the U.S. economy, touting strong growth of the U.S. economy along with healthy wage growth. It also highlights the widening fiscal deficit, which reached 4.6 percent of GDP for FY2019 versus 3.8 percent of GDP in FY2018. Both higher expenditures and lower revenues as a percent of GDP contributed to the fiscal deterioration, resulting in continued fiscal stimulus despite a U.S. economy at full employment with growth above potential. Fiscal policy matters in the current context, as the International Monetary Fund has shown fiscal policy to be a key driver of current account balances.
Stephanie Segal is a senior fellow with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.
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