The US Treasury has placed China, Germany and Japan on a new currency watchlist, warning that all three faced extra scrutiny and potential retaliation by Washington as a result of concerns over growing imbalances in their trade relationship with the US.
Friday’s move by the US Treasury to put out a new “monitoring list” — and take the potentially provocative step of including Germany alongside China and Japan on it — comes amid continuing political pressure in the US for the government to take a stronger stand against currency manipulation.
It also follows a new strengthening in the yen on the back of the Bank of Japan’s lack of policy action this week as well as fresh US gross domestic product data that showed a strong dollar continued to be a drag on US growth.
None of the US’s big trading partners had engaged in currency manipulation in the past year, the Treasury said in its twice yearly foreign exchange market report to Congress.
But it made clear that it was concerned about rising imbalances with some of its big trading partners and the impact of that on the global economy.
It said the “material” current account and “significant” bilateral trade surpluses China, Germany, Japan and South Korea had with the US resulted in those economies joining the new list, which the Treasury is required to compile as a result of trade legislation passed last year. Taiwan was also included on the list because of its current account surplus and “its persistent, one-sided intervention in foreign exchange markets”.
In the case of Germany, which has less control over swings in its currency given its use of the euro, the US Treasury made clear that its main concern was the country’s current account surplus, which accounted for the bulk of the eurozone area's surplus and had pushed the latter above 3 per cent of the zone’s GDP.
“The European Central Bank has not intervened in foreign currency markets since 2011 [and the aftermath of an earthquake and tsunami in Japan],” the Treasury said. “Nonetheless, Germany has the second-largest current account surplus globally. This represents substantial excess saving — more than 8 per cent of GDP — that could, at least in part, be used to support German domestic demand, while reducing the current account surplus and contributing markedly to euro-area and global rebalancing.”
The requirement for the list was intended by Congress to create more automatic, data-driven criteria for action by the Treasury against other countries seen to be manipulating their currency. “Treasury will closely monitor and assess the economic trends and foreign exchange policies of these economies,” it said in its report.
Under the new law, the US has to launch special currency talks with any country that has bilateral trade surpluses worth more than $20bn, current account surpluses above 3 per cent of GDP, and is making “repeated” net foreign currency purchases equivalent to more than 2 per cent of GDP in any given year.
If countries do not address the concerns, the law requires the president to respond by denying access to certain US development loans, banning them from government procurement contracts, calling for stepped-up International Monetary Fund surveillance, and/or excluding them from any trade negotiations.
The fact that no economy met all three criteria in the past year, the Treasury said, was a reflection of the unusual dynamics of the global economy over this period, with big emerging economies intervening to stop the depreciation of their currencies in the face of high capital outflows. But “the extent of these flows was unusually high by historical standards, which underscores the possibility that more economies may trigger these thresholds,” Treasury economists wrote.
Only China and South Korea would have tripped all three criteria at any point in the past 10 years. China would have met them in five of the past 10 years, underscoring why many US politicians and big companies such as Ford have called for Washington to take a tougher stand on currency manipulation.
According to the US Treasury, Beijing sold foreign currency assets worth $480bn — or about 4 per cent of GDP — between August 2015 and March to prop up China’s renminbi.
The Treasury also continued its recent pattern of softening its language on the renminbi. In its October report it dropped a longstanding assessment that the currency was “significantly undervalued” and replaced it with the statement that the Chinese currency was “below its appropriate medium-term valuation”.
In the latest report it offered what reads like cautious praise for Chinese authorities and their efforts to convince markets that they were not planning a depreciation.
“Overall, the [renminbi] should continue to experience real appreciation over the medium term,” it said. “Chinese authorities have stressed that the [renminbi] 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.”
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