Asia’s Dodged Currency Maneuvers

The US Treasury Department’s October report to Congress on currency manipulation again absolved major trade partners although in Asia especially they fall under “close monitoring.”  It noted further large reserve accumulation in the first half, with China’s “excessive” despite monthly moderation, as the US current account deficit was more than halved from the pre-crisis peak at 2.3 percent of GDP and the dollar appreciated 7 percent against leading units. In real effective terms the renimbi depreciated the most after the March band widening and has since firmed. Investment continues to contribute half of output with private consumption at 35 percent although services are now the biggest industry component in rebalancing progress, according to Treasury’s International Affairs office.  In the first six months the current account surplus was $100 billion or 2 percent of GDP, down from the 10 percent registered in 2007. Exchange rate adjustment will encourage domestic demand and damp financial system distortions, in particular the 20 percent bank reserve requirement to drain liquidity, Washington believes. At the July bilateral dialogue Beijing agreed to decrease intervention and publish operations in the future through the IMF’s reporting format. On a trade weighted basis the RMB is up 1 percent through Q3 against the dollar, and recent months’ intervention was “modest” in light of offsetting capital outflows, the study suggests.  The reference rate remains tightly controlled but was down 1 percent so far this year. The Fund’s July Article IV survey pointed to 5-10 percent undervaluation and the G-20 has pressed for regular currency reserve and operation breakdowns in the interest of global cooperation and transparency. Japan has maintained a floating regime without intervention for three years, and despite the world’s number two reserve pile at $1.2 trillion foreign asset purchase has been “ruled out” under Abenomics monetary policy. The yen has depreciated 25 percent versus the dollar since October 2012 and the current account surplus has almost disappeared with offshore production relocation.  The free-trade TPP negotiations are stuck on agriculture issues but financial services reciprocity has not been a prominent source of friction unlike the past.

Korea echoed the G-20 vow not to target the exchange rate for competitive advantage and the central bank has spent around $35 billion through its reserve position and forward book on dollar buying and selling through September. The IMF classified most transactions as anti-appreciation and placed won undervaluation at 5 percent to support the 6.5 percent of GDP current account surplus. Macro-prudential restrictions have curbed external borrowing but may also interfere with commercially- determined rates and officials should only participate in “disorderly” markets, Treasury urges. Taiwan’s current account bulge is twice Korea’s and its $425 billion in reserves are superfluous “by any metric” according to the survey. Private capital outflows were almost $30 billion in the first half on life insurer portfolio allocation abroad, and the local dollar has been flat against the greenback although the exception is to limit interference to “exceptional circumstances.”