CBA: South Korea faces a greater risk of being named a currency manipulator than China

Donald Trump. Photo: Justin Sullivan / Getty Images

US president Donald Trump’s pledged during the election campaign to name China as a currency manipulator, but analysts at the Commonwealth Bank don’t think the US will go that far and believe South Korea is a more likely candidate.

Currency manipulation occurs if an economy meets three criterias: a current account surplus of more than 3% of GDP, a trade surplus with the US of more than US$20 billion and persistent net purchases of foreign exchange of at least 2% of an economy’s GDP over ayear. Currently China only meets one criteria for being a currency manipulator: a trade surplus with the largest global economy to the tune of US$347 billion, CBA said. While China has intervened in currency markets, it is to strengthen the yuan rather than weaken it.

On the other hand, CBA said, South Korea meets the first two conditions and based on available data it just falls short of breaching the third.

Trump spent much of the campaign blaming China’s for America’s economic woes and vowed to name the country a currency manipulator on his first day in the White House. The problem though is China, the world’s second-biggest economy, hasn’t been pushing down its currency to benefit its exporters in years.

The US can review the conditions and impose sanctions on China but the available tools aren’t a biggie, CBA said. The curbs include rigorous surveillance of exchange rate policies; banning the US Federal government from issuing procurement contracts to businesses from China; and banning the US government’s Overseas Private Investment Corporation from financing projects.

Still, a declaration of China as a currency manipulator could provide Trump with an excuse to use other legal avenues to initiate restrictive trade policies. The President has authority to impose a range of protectionist measures such as tariffs, duties and quotas under a range of conditions, CBA said. Even there as this chart shows, CBA estimates Taiwan and South Korea could be hit rather than China

CBA also says China has the ability and the need to retaliate against US trade action. As the following chart illustrates, China’s dependence on US has diminished, giving Beijing the room to respond.

While it’s true that China pretty clearly manipulated its currency to gain an advantage over global competitors. It bought foreign currencies, the U.S. dollar in particular, to push them higher against the yuan. As it did, it accumulated vast foreign currency reserves — nearly $4 trillion worth by mid-2014. But now the Chinese economy is slowing, and Chinese companies and individuals have begun to invest more heavily outside the country. As their money leaves China, it weakens the yuan and China has been trying to put a floor to it instead of letting it slip further.

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