The US Treasury’s Lengthening Litmus Tests

The Treasury Department’s regular review of major trading partner currency policies again did not label China a manipulator on evidence of reduced direct intervention, while calling attention to state controls and subsidies that still constitute “unfair practice.” In tariff negotiations Beijing has reportedly pledged exchange rate restraint, as market determination provisions were written into Washington’s new agreement with Canada and Mexico. Elsewhere in emerging Asia, Korea was praised for better disclosure and India was dropped from the monitoring list with the three criteria no longer applying, while Malaysia, Singapore and Vietnam were added. The thresholds will be tighter in future reports to cover all countries with at least a $20 billion goods advantage; 2% instead of previous 3% current account surplus; and unilateral interference over 6 months equal to a minimum 2% of GDP. With the definition expansion 15 partners will be tracked in detail in the context of the Department’s analysis of “important” developing economies. It expresses “significant concerns” over the renimbi level against the dollar after 5% depreciation with the $420 billion bilateral trade imbalance last year. China should continue shifting from fixed investment to household consumption, widen foreign access through structural policies, and boost reserve management transparency. Its G-20 commitment not to competitively devalue will be further examined at the June summit in Japan, as global current account imbalances have been “broadly stable” since 2015 at close to 2% of GDP with Japan and Germany also in the top surplus ranks.

In 2018 emerging market portfolio outflows were $300 billion, but stable FDI offset them, as headline global reserves stayed constant at $11.5 trillion. Non-G3 currencies’ share of the total is now 8%, representing dollar diversification even as pools often exceed short-term debt and import needs. As of May with economic slowdown and bank deleveraging Chinese depreciation pressure is again clear, with net foreign exchange sales amid minor leakage from the $3 trillion reserve pile as documented in the errors and omissions balance of payments category. To keep 6.5% growth Beijing should avoid credit easing and off-budget moves that can distort the Yuan’s value, as broader reforms including on non-tariff barriers strengthen it over time, in Treasury’s view. Korea was excused as the goods surplus fell below $20 billion on higher US fuel and chemical exports. Intervention has been negligible, as officials stress domestic demand stimulus and labor market changes as core competitiveness strategies. Singapore runs external income and services deficits, but manages the local dollar as the main monetary policy tool as the IMF estimates current 5%-plus undervaluation. It has recently shared intervention data with a six-month lag, and may adjust the mandatory pension formula so that citizen savings can be diverted potentially into foreign assets. Malaysia’s surplus with the US was almost $30 billion last year, and the central bank sold the dollar equivalent of 3% of GDP to defend the ringgit, although exact details are unknown. Vietnam’s was $40 billion and it has been a big export relocation base from China even before the tariff fight with the Trump administration. It operates a dollar peg within a tight range and does not publish intervention statistics, and as reserves meet standard adequacy metrics flexibility and transparency should be watchwords to match the watching brief.