Steve Mnuchin Declines To Name China A Currency Manipulator, Will Leave That To Trump’s Twitter Account

If you ask Donald Trump, everybody is a currency manipulator.

But if you ask Steve Mnuchin, nobody is.

Treasury on Tuesday released their semi-annual FX report and no major US trading partner was slapped with the derisive “manipulator” label. Treasury again refrained from applying the label to China, despite the US president having made a habit of it years ago.

Treasury said nine major trading partners warrant placement on the monitoring list. Vietnam, Italy, Ireland, Singapore and Malaysia join China, South Korea, Japan, and Germany.

The Vietnam story is interesting. US imports from Vietnam surged more than 40% in Q1 amid the standoff between Washington and Beijing.

“Treasury will continue its enhanced bilateral engagement with China regarding exchange rate issues, given that the RMB has fallen against the dollar by eight percent over the last year in the context of an extremely large and widening bilateral trade surplus”, Steve Mnuchin said, in the press release.

In the full report, Treasury admits that “direct intervention in foreign exchange markets by the People’s Bank of China over the last several months appears limited.” But the report derides what the US calls “China’s long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market.”

The irony is that China’s recent history includes “large-scale” efforts to prevent depreciation. There was of course the mad scramble to control market expectations following the 2015 devaluation, which led to the mass liquidation of reserves, and then there was the introduction of the CCAF in the summer of 2017 when the PBoC engineered an epic short squeeze. And don’t forget the four-pronged approach China employed in the course of putting the brakes on last summer’s slide when the yuan looked like it make break 7 (Specifically, China reinstated forwards rules – August 3 – chided onshore banks for selling RMB – August 7 – moved to squeeze offshore liquidity – August 16 – and reinstated the CCAF – August 24).

Treasury goes on to decry state subsidies in China, and there’s the obligatory nod to “addressing” the bilateral trade deficit, despite the fact that no economist thinks bilateral trade deficits actually mean anything. “The pervasive use of explicit and implicit subsidies and other unfair practices are increasingly distorting China’s economic relationship with its trading partners”, the report reads. “Indeed, the United States goods trade deficit with China reached a record $419 billion in 2018.” And here we all thought Trump was going to remedy that. Remember, “trade wars are good and easy to win!”

The report goes on to state (in literal bolded font) that “Starting with this Report, Treasury will review and assess developments in a larger number of trading partners in order to monitor for external imbalances and one-sided intervention.”

Treasury says the Administration “remains deeply concerned by the large trade imbalances in the global economy” and, amusingly, the report marvels at the extent to which “the U.S. trade deficit widened further in 2018, as domestic demand growth picked up in the United States while slowing in major U.S. trading partners.”

Of course one reason why domestic demand picked up in the US and slowed for America’s trade partners is that Trump delivered a Pulp Fiction-style adrenaline shot to the late-cycle economy, while his incessant trade threats served to undermine growth in other locales. That late-cycle stimulus and the threat of tariff-related price pressures forced the Fed to lean hawkish, pushing up the dollar, further undermining global markets and confidence as financial conditions tightened and USD liquidity vanished. Treasury, it would appear, is oblivious to that (they’re not oblivious, they just can’t mention any of it because it undercuts the whole argument).

In the section on China things get silly. Once again, the US wants to have its cake and eat it too. Treasury wants market forces to determine the exchange rate for the yuan, but only if those market forces are causing it to appreciate. If, on the other hand, the market pushes the currency lower, Treasury expects the PBoC to step in. To wit:

Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China’s exchange rate for competitive purposes. Treasury continues to urge China to enhance the transparency of China’s exchange rate and reserve management operations and goals. Treasury remains deeply disappointed that China continues to refrain from disclosing its foreign exchange intervention. Treasury is closely monitoring developments in the RMB and continues to have ongoing discussions with Chinese authorities.

There’s also a long-winded critique of China’s economic model that finds the US dictating to Beijing what should and shouldn’t be done. This takes the form of preaching:

China needs to aggressively address market-distorting forces, including subsidies and state-owned enterprises, enhance social safety nets to support greater household consumption growth, and rebalance the economy away from investment.

The report comes on the heels of a move by the Commerce Department to open the door to countervailing duties on imports from countries deemed to be pursuing competitive devaluation. That news hit late last Thursday and found Wilbur Ross declaring that he’s just “put foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm US industries”.

Read more: Did The Trump Administration Just Announce A Major Currency Escalation?

Last week, we put that in the context of Treasury’s official FX report as follows:

The US has refrained from officially branding China a currency manipulator over the course of the trade war and you’ll recall that the now defunct draft truce would have included an FX agreement between Washington and Beijing. Although the Commerce Department will defer to Treasury when it comes to deciding if a given country is engaged in “manipulation”, it seems clear that Trump is dissatisfied with the existing setup whereby Treasury conducts a technical study that’s based on a set of objective criteria.

Once again, that technical study has failed to turn up any witches for Trump to burn, but that could change in the next report if China, Japan and Europe don’t manage to placate the administration on trade.

You’re reminded that over the weekend, a speech by Guo Shuqing, head of China’s banking and insurance regulator, mocked the world’s blatantly contradictory stance towards the RMB. “Guo said the yuan’s weakness caused by the trade war makes the US government worried about the diminishing effects of higher tariffs”, Bloomberg wrote, recapping the remarks and adding that Guo “said it was ‘ridiculous’ that developed countries have long asked for more currency flexibility, but when the yuan’s rate become more market oriented, some of them showed fear.

Guo also warned that speculators shorting the yuan “will inevitably suffer from a huge loss”.

Because everyone who is trying to actively push their currency lower threatens to inflict “huge losses” on shorts, right?

Full report