The Treasury Department backs down on some of its criticism of China's currency policies

  • The US Treasury Department moderated its criticism of China’s foreign exchange policies, but highlighted its large bilateral trade deficit with the US.
  • China does not actually match the Treasury’s three criteria for being labelled a currency manipulator.
  • It’s likely Trump pulled back from criticising China’s FX policies due to the situation in North Korea, which he himself implied in an interview earlier this year.

The US Treasury Department once again chose not to name China a currency manipulator and moderated its criticism of the country’s foreign exchange policies in its latest semi-annual report on the FX practices of major trading partners.

The department did, however, keep China on the “Monitoring List,” and pointed to its large bilateral trade surplus with the US.

“China’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, China, and the global economy,” the department said in the report.

The Treasury said it remains “concerned by the lack of progress made in reducing the bilateral trade surplus with the United States.” And it added that China continues to “pursue a wide array of policies that limit market access for imported goods and services, and maintains restrictive investment regime that adversely affects foreign investors.”

“The report seemed less critical of China’s FX policy,” Craig Chan and Wee Choon Teo, research analysts at Nomura, said in a note to clients. “[C]riticism of China was relatively muted, except for the lack of progress on narrowing the bilateral trade surplus.”

In February, US President Donald Trump called China the “grand champions” of currency manipulation. And during his campaign, he pledged to label the country a currency manipulator on his first day in office — although he did not.

It’s likely that the president pulled back on calling China a currency manipulator given the delicate situation with North Korea. He implied as much in an interview with The Economist published in May 2017:

“Now, with that in mind, [Chinese president Xi Jinping is] representing China and he wants what’s best for China. But so far, you know, he’s been, he’s been very good. But, so they talk about why haven’t you called him a currency manipulator? Now think of this. I say, ‘Jinping. Please help us, let’s make a deal. Help us with North Korea, and by the way we’re announcing tomorrow that you’re a currency manipulator, OK?’ They never say that, you know the fake media, they never put them together, they always say, he didn’t call him a currency [manipulator], number one. Number two, they’re actually not a currency [manipulator]. You know, since I’ve been talking about currency manipulation with respect to them and other countries, they stopped.”

There are three criteria that must be met for a country to be labelled a currency manipulator by the Treasury Department:

  1. The country must have a significant bilateral trade surplus with the US.
  2. The country has a “material” currency account surplus.
  3. The country is engaged in persistent one-sided intervention in the foreign exchange market.

Major trading partners that match two out of the three criteria are added to a “Monitoring List,” and remain there for at least two consecutive reports. China, which remained on the list, actually only matches one of the criteria.

Nomura’s Chan and Teo said that the reason why China was left on the Monitoring List, despite the fact that it has only met one of the three criteria since October 2016, is because of a condition the Treasury added in its Spring 2017 report: any major trading partners that account for a “large and disproportionate share” of the overall US trade deficit will be added to the list — even if they don’t meet two out of the three criteria.

In addition to China, the Treasury included Japan, Korea, Germany, and Switzerland on its Monitoring List in the latest report. Taiwan, meanwhile, was removed.

The last time the US designated China a currency manipulator was from 1992 to 1994. The chart below from Nomura breaks down the three criteria listed above for the US’ biggest trading partners:

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