The US Treasury’s Awkward Asia Manipulations

The US Treasury Department’s International Affairs office issued another delayed biannual congressional report on global currency practice which again cited China’s “persistent and substantial undervaluation” short of outright manipulation as defined by the 25-year old original statutory terms. It repeated resistance to market direction for RMB appreciation, while noting that since mid-year, like other emerging economy units, upward pressure has dissipated. In the final 2011 quarter reserve accumulation slowed as capital inflows to the developing world were buffeted by lower GDP growth figures and safe haven diversion from the European debt crisis.  However the IMF’s multi-model rendering of appropriate exchange rate levels for rebalancing continues to see Brazilian real overvaluation and Chinese and Korean currency undercutting against the dollar, while the Mexican peso reflects medium-term fundamentals. The survey adds that recent risk aversion has pushed the advanced-nation Swiss franc and Japanese yen to records, prompting unilateral interventions from their central banks to preserve formal and informal ceilings. A euro/franc temporary cap was set and Tokyo spent $115 billion of its world number two $1.25 trillion reserve pile to keep the yen above 75/dollar in consecutive operations even as foreign exchange conditions were “orderly” so that other monetary authorities refrained from participation. The update was postponed pending the outcome of the G-20 November conclave in France, where Beijing reaffirmed a commitment to greater flexibility to aid domestic consumption and avoid “competitive devaluation.” Although misalignment has since become less pronounced, progress has been limited for the US and major trading partners serving to impede both lasting international economic recovery and financial system evolution, the Treasury finds. On Japan the regime is floating and the yen accounts for 20 percent of daily forex turnover, but recent official reaction to strength was misplaced with increased structural “dynamism” a better route to influencing commercial position, it suggests.

In Korea a market-determined rate is accompanied by “smoothing” moves against volatility which have generated two-sided support over 2011. The won is 10 percent undervalued on a trade-weighted basis, according to the IMF, and authorities have introduced numerous “macro-prudential” curbs for short-term debt and foreign currency exposure, including new proposed bond profit and derivatives taxes. Although the banking sector relies on external wholesale funding, intervention should be confined to exceptional cases and overall management is too rigid, the review indicates. Taiwan’s policies received lighter treatment than the mainland’s with no challenge to the central bank line of interference only for “seasonal or irregular factors and disorderly shifts.” With $400 billion in reserves, the local dollar is down 5 percent against the greenback on the eve of presidential elections which may provoke their own chaotic course.