This week the US Department of the Treasury issued its semi-annual report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. Under The Omnibus Trade and Competitiveness Act of 1988 the Treasury Secretary must ‘consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.’ Plus, under The Trade Facilitation and Trade Enforcement Act of 2015 the Treasury Secretary must ‘monitor the macroeconomic and currency policies of major trading partners and engage in enhanced analysis of those partners if they trigger certain objective criteria that provide insight into possibly unfair currency practices’.
Under the 2015 Act the Treasury focuses on 3 criteria and thresholds: First, ‘a significant bilateral trade surplus is one that is at $20 billion’; Second, ‘a material current account surplus is one that is at least 3 percent of gross domestic product’; and third, ‘persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2 percent of an economy’s GDP over a 12-month period’.
In the latest report, the US Treasury named China, Japan, Korea, India, Germany and Switzerland as trading partners whose currency practices require monitoring but refrained from naming any major trading partner as a currency manipulator. The Treasury found that no major trading partner met all 3 of their criteria. Unsurprisingly, despite it only meeting one of the criteria (a significant bilateral trade surplus) the spotlight remained on China. The report noted it ‘constitutes a disproportionate share of the overall U.S. trade deficit’ and ‘As a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act.’ While Treasury Secretary Mnuchin commented: ‘Of particular concern are China’s lack of currency transparency and the recent weakness in its currency. These pose major challenges to achieving fairer and more balanced trade, and we will continue to monitor and review China’s currency practices’.
While there is currently a lot of focus on the decline in the Renminbi against the dollar given the trade tensions with the US, this is against a backdrop of US dollar strength. The Chinese authorities have made it clear they do not intend to weaken the exchange rate to offset the tariffs. We view the recent weakness as temporary and exacerbated by trade tensions and slowing growth concerns; but China has a positive NFA position and buffers to counteract any such difficulties. Moreover, the increasing internationalisation of the renminbi as projects such as the Silk Road progress, China’s financial markets open up, more trade is denominated in renminbi and the renminbi is increasingly used as a reserve currency remain positive medium-term drivers.