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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 17 October, neither mainland China nor any other major U.S. trading partner meets the requirements to be designated as a currency manipulator. Treasury has also dropped Taiwan from the list of U.S. trading partners 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 (the four quarters ending June 2017) Japan, South Korea, Germany and Switzerland each met two of these three criteria. Mainland China met only one but accounted for “a large and disproportionate share” of the overall U.S. trade deficit. As a result, these five 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 in addition to maintaining an extremely large and persistent bi-lateral trade deficit with the United States, mainland China 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’s multi-lateral external position has undergone greater adjustment in recent years, with its current account surplus falling to 1.4 percent of GDP in the first half of 2017 from 1.8 percent of GDP in 2016 as well as 10 percent of GDP in 2007. The report adds that after engaging in one-way, large-scale intervention to resist appreciation of the renminbi for a decade, Beijing’s recent intervention in foreign exchange markets, tightened capital controls, and increased discretion over setting the daily fixing rate of the RMB have likely prevented a disorderly currency depreciation that would have had negative consequences for the United States, mainland China and the global economy.

Treasury remains concerned by the lack of progress made in reducing the bi-lateral trade surplus with the United States, however. The agency believes further opening of the mainland Chinese economy to U.S. goods and services as well as reducing the role of state intervention and allowing a greater role for market forces would provide more opportunities for American firms and workers to compete in mainland Chinese markets and facilitate a more balanced bi-lateral economic relationship. Treasury places significant importance on mainland China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target its exchange rate for competitive purposes. The agency also places high importance on greater transparency of mainland China’s exchange rate and reserve management operations and goals.

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