WASHINGTON — The U.S. Treasury Department again declined to name China a currency manipulator in its semiannual report to Congress on Friday.
Treasury also said it found five countries — China, South Korea, Japan, Taiwan and Germany — met two of three criteria needed to be eligible for enhanced monitoring for using exchange rate policies to gain an unfair competitive trade advantage.
Treasury placed the five countries on a monitoring list and said it will “closely monitor and assess the economic trends and foreign exchange rates of these economies.” But it declined to elevate the five for intensified and enhanced monitoring because none of them met all three criteria.
A new feature of Treasury’s report on the foreign exchange rate polices of America’s major trading partners was the establishment of an exchange rate monitoring process.
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Treasury will undertake enhanced monitoring of countries if they meet three criteria. They must have: a significant bilateral trade surplus larger than $20 billion, or 0.1 percent of U.S. gross domestic product, with the U.S; an economy that has engaged in persistent “one-sided intervention in the foreign exchange market, defined as conducting repeated net purchases of foreign currency amounting to more than 2 percent of its GDP over the year and an economy that has a material current account surplus larger than 3 percent of that economy’s GDP.
“While no economy met all three of the criteria, this result is a reflection, in part, of the dynamics of the global economy during the past year, in which capital outflows from emerging markets have led a number of economies to engage in foreign exchange intervention to resist further depreciation of their currency [rather than appreciation],” Treasury said. “The extent of these flows was unusually high by historical standards, which underscores the possibility that more economies may trigger these thresholds going forward.”
If a country does meet all three criteria and is subjected to the enhanced monitoring, the U.S. is required to engage in consultations. If the country in question fails to take appropriate action after one year to “correct its undervaluation and external surpluses” the president can take several punitive steps, including: denying access to OPIC funding, excluding the country from U.S. government procurement, calling for more scrutiny from the IMF and instructing the U.S. Trade Representative’s office to take into account insufficient action in determining whether a country is eligible to enter into trade negotiations with the U.S.
The president can also waive “remedial action” based on specified circumstances.
Treasury said China has a “significant bilateral trade surplus with the U.S. and a material current account surplus.”
“China has intervened heavily in the foreign exchange markets in recent months to support [its currency], after strong downward market pressure triggered by a surprise change in China’s foreign exchange policy last August,” Treasury said. “Such a depreciation would have had negative consequences for the Chinese and global economies. More clarity over exchange rate goals, and that devaluation will not be used to support growth, would help stabilize the market.”
But Treasury did not charge the world’s second-largest economy for undervaluing its currency to gain an unfair trade advantage. Such a decision, which the Obama administration has opted not to take in multiple reports, could have led to punitive trade sanctions at the World Trade Organization.
“China’s central bank, the People’s Bank of China, has sought to maintain flexibility in how it manages the exchange rate,” the report said. “It has also indicated that there is no basis for persistent…depreciation based on economic fundamentals. Stabilizing growth, including with fiscal policies that support consumption and lower China’s high national savings rate, should be part of a policy mix that supports economic rebalancing and re-anchors expectations.”
Core factors supporting the yuan included high-net savings, “strong external balances which include a sizeable and growing current account surplus, and improved terms of trade reflecting lower commodity prices.”
“Overall, the [yuan] should continue to experience real appreciation over the medium-term,” the report concluded. “Chinese authorities have stressed that the [yuan] will continue to be a strong currency, given China’s current accounts surplus, higher economic growth, large foreign exchange reserves, and stable fiscal and financial conditions.”