The Treasury Department’s Manipulation Dodge Dudgeon

As the Trump administration demanded currency provisions in the NAFTA and Korea free trade agreements under renegotiation, the Treasury Department again found no formal manipulation among major partners in its regular surveillance report mandated under 2015 legislation. It lists detailed criteria for monitoring: at least a $20 billion bilateral surplus equal to 3% of GDP and unilateral intervention over 12 months at 2% of that figure in scope. India was the only emerging market added alongside China and Korea, while Latin America was dropped altogether. China’s Yuan rose against the dollar in 2017, but was unchanged against a broader basket, and the report criticized “non-market” economic development and lack of reserve management disclosure. Korea’s current account surplus was 5% of GDP on near 15% won appreciation, both diverging from fundamentals in the IMF’s view. India bought $55 billion in foreign exchange on heavy direct and portfolio investment inflows, and its reserves may be excessive with existing capital controls. Germany, Japan and Switzerland were the other countries highlighted, and Washington urged Tokyo only to intervene in “exceptional circumstances.” as it presses for a possible bilateral accord to succeed the Trans-Pacific Partnership. Prime Minister Abe on a White House visit asserted that loose monetary policy was designed to boost growth and that the safe haven yen nonetheless continued to rise, as the upcoming Trump-Kim Jong Un summit was the main topic. For the group the Treasury lamented persistent global imbalances due to insufficient domestic demand and currency adjustments, although it noted a one-third jump in net private capital flows to developing economies which helped boost reserves to $11.5 trillion. The total provides “ample coverage” of short-term debt and import costs, so better policies rather than accumulation is the preferred course, the survey remarked.

China’s goods surplus was $375 billion last year, and the renimbi was up almost 4% versus the dollar in the first quarter. Capital outflows plummeted to $150 billion in the second half from $350 billion in 2016, as estimated currency sales fell below $10 billion with the central bank still not publishing the data. It must also be wary of near 15% credit double GDP growth as it tries to facilitate financial system deleveraging. Korean domestic demand has picked up under new leadership committed to export offset, but adjustment remains “limited.” The US has a services surplus, but the IMF still considers the won undervalued as $400 billion in reserves are deployed in unreported spot and forward transactions. India has a 2% of GDP current account gap but goods and services surpluses with the US and has been “exemplary” in reporting intervention the central bank claims is a result of “undue volatility.” The rupee has appreciated in real terms and is “moderately overvalued” in the IMF’s calculation, so deliberate debasement is a remote scenario. The update concludes with a section on capital flow volatility based on a sample of 70 developing economies, and finds that current trends roughly reflect pre-crisis ones, although it has spiked in a handful like the BRICS, Korea and Taiwan. In Mexico and Russia both inflow and outflow swings are greater as respective free trade and sanctions deviations skew the standard, it suggests.