The U.S. Treasury said no major trading partner is manipulating its currency to gain an advantage in trade, while lauding China for acting to avoid a "disorderly" depreciation and then allowing the yuan to rise against the dollar this year.
"The Chinese currency has moved recently in a direction that would help correct the bilateral trade imbalance with the United States," according to the Treasury's twice-a-year foreign currency report released Tuesday in Washington. "But on a trade-weighted basis, the currency has become more competitive globally" amid a weakening greenback.
President Donald Trump's campaign rhetoric over China's trade practices and America's roughly $350 billion merchandise-trade deficit with the country has softened as the two nations try to forge cooperation on addressing the threat of North Korea. Trump—who has backed away from a campaign promise to label the world's second-largest economy a currency manipulator—is scheduled to meet with President Xi Jinping in China next month.
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"It's a currency manipulation report, and they haven't been doing much manipulating," Steven Englander, head of research and strategy at Rafiki Capital Management in New York, said in an email. "The report doesn't have much teeth, so why offend China during Party Congress."
The Treasury kept China, South Korea, Japan, Germany and Switzerland on its currency monitoring list for nations it considers to have a significant trade surplus with the U.S., a high current-account surplus or to be intervening in the currency markets.
The department removed Taiwan from its watch list, citing a reduction in its currency intervention, but the U.S. will continue to urge the economy to increase transparency in its foreign-exchange interventions and reserve holdings.
India Concern
The U.S. voiced concern over a "notable increase in the scale and persistence" of India's foreign-exchange purchases. While the country wasn't added to the watch list, the Treasury said it will be "closely monitoring" India's currency and macroeconomic policies. India's bilateral trade surplus with the U.S. was $23 billion for the 12 months through June, the report said.
As in the April currency report, the first from the Trump administration, 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. The U.S. said it "remains concerned by the lack of progress" in narrowing the gap, urging China to open up its economy more and give market forces a greater role.
The latest Treasury report removed a reference from April to urging a "durable" policy shift away from resisting appreciation, now saying that China has "significantly curtailed" efforts to prop up the yuan.
Rapid Rise
The Chinese yuan gained as much as 8% against the greenback this year amid easing capital outflows, rebounding from a 6% loss last year. However, that rally was cut short in September after the PBOC effectively removed a reserve requirement for trading currency forwards, making it easier for traders to purchase U.S. dollars. The Chinese exchange rate is still about 5% stronger this year, boosted in part by speculation that policy makers will allow the currency to strengthen ahead of a key Communist Party meeting, scheduled to begin Wednesday.
"The U.S. report is just a description that the yuan has appreciated against the dollar," said Iris Pang, an economist for Greater China at ING Groep in Hong Kong. "China will continue to use both window guidance to limit outflows and strengthen the fixing to guide the yuan spot rate higher. China determines the path of the yuan not from the worry of whether the U.S. would brand the yuan as a manipulated currency."
China Reform
People's Bank of China Governor Zhou Xiaochuan earlier this month made a fresh call to open up the nation's financial sector, warning that reform will be more difficult if the window of opportunity is missed.
The U.S. hasn't branded any country a manipulator since 1994. The department is required by law to report to Congress twice a year on whether America's major trading partners are gaming their currencies. The report is the government's formal channel to impose the manipulator designation, leading to a year of negotiations for a solution and penalties if the practice continues.
The report's conclusions include:
- Japan, Germany and South Korea have met two of the three criteria in every report since April 2016; Switzerland has met two since October 2016.
- Japan's current account surplus over the four quarters through June was the highest since 2010.
- South Korea's current account surplus has narrowed. Treasury urged the nation to boost domestic demand and avoid "excessive reliance" on external demand for growth.
- Treasury urges Germany to take meaningful fiscal reforms to boost domestic growth.
- Switzerland still has room to use monetary policy to fight deflation, which would lower the need for currency intervention.
The Treasury left the criteria for manipulation unchanged: having a trade surplus with the U.S. above $20 billion; having a current-account surplus amounting to more than 3% of gross domestic product; and repeated currency depreciation by buying foreign assets equivalent to 2% of output over the year.
From: Bloomberg News
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