As tipped by… well, by Donald Trump himself, the Treasury department refrained from labeling China a currency manipulator on Friday in its semiannual report on the foreign-exchange policies of major U.S. trade partners.
That doesn’t mean there wasn’t plenty of tough talk, but the Treasury was essentially forced to admit that the PBoC’s massive interventions in the spot market since August 2015 have been an effort to prop up (not drive down) the yuan. “China’s recent intervention in foreign exchange markets has sought to prevent a rapid [yuan] depreciation that would have negative consequences for the United States, China, and the global economy,” the report notes. Of course all that intervention (read: FX reserve burn) was necessary in the first place because of a devaluation.
Here’s the full bullet point summary via Bloomberg:
- U.S. Treasury Department keeps same six countries on FX watch list, says no major trading partner met criteria to be designated an FX manipulator.
- Treasury to scrutinize China trade policies “very closely”
- “Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and not to target China’s exchange rate for competitive purposes”
- Japan needs to use all policy levers to help economy, Treasury says in twice-yearly report on exchange rates released in Washington
- U.S. to watch S. Korea FX closely, Treasury urges more flexibility
- Treasury estimates S. Korea was a net FX seller in 2016 of $6.6 billion, or 0.5% of GDP
- Taiwan urged to limit intervention to disorderly markets
- Stronger German domestic demand would underpin euro
- Treasury: Swiss interventions should be more transparent
- “The United States cannot and will not bear the burden of an international trading system that unfairly disadvantages our exports and unfairly advantages the exports of our trading partners through artificially distorted exchange rates”
- ’’Treasury is committed to aggressively and vigilantly monitoring and combating unfair currency practices’’
So for now, in the interest of accommodating China at a time when Beijing is a necessary ally given the turmoil on the Korean Peninsula, Trump is going to let sleeping dogs lie.
But we’d imagine once someone explains the nuances to him (namely that if he wants to really get a picture of what’s going on, he’ll need to watch the trade-weighted basket as well as the bilateral rate), the President might eventually change his mind. Especially once the situation in Pyongyang gets “resolved.”