China could come off currency watchlist

The Obama administration has taken a step towards dropping China from a US currency manipulation watchlist even as Republican candidate Donald Trump promises to declare Beijing a manipulator on day one of his presidency. 

Mr Trump has accused China repeatedly of currency manipulation and using the policy to suck jobs out of the US. He has vowed to impose punitive tariffs on its imports into the US in a move economists fear could set off a trade war between the world’s two biggest economies. 

But the US Treasury on Friday said that by its reckoning China now met just one of the three criteria for inclusion on a currency watchlist after its current account surplus fell below 3 per cent of gross domestic product in the year to June. Under Treasury’s current guidelines that means that, if nothing changes, Beijing could fall off the watchlist as soon as next year. 

For their twice yearly foreign exchange report to Congress Treasury officials also monitor a country’s trade balance with the US as well as any “persistent one-sided intervention” in currency markets. 

The US goods trade deficit with China was $356bn in the year to June and remains the largest of any with US trading partners, though it was down from $363bn for the 12 months to June 2015. The US also had a $35bn surplus in services trade with China in the year to June 2016. 

But the trade deficit was the only criteria that qualified it for inclusion on the watchlist. To remain on the list countries have to meet two of the three criteria, although under Treasury’s rules any country included must remain on the list for two consecutive six-monthly reports afterwards. 

China’s forays into currency markets had actually been to the benefit of other big economies over the past 18 months as they had taken place to stop a potentially disruptive devaluation of the renminbi, Treasury economists said in their report. 

“China’s intervention in foreign exchange markets has sought to prevent a rapid Rmb depreciation that would have negative consequences for the Chinese and global economies,” they wrote. 

Altogether Beijing had sold more than $570bn in foreign exchange assets in the year to August to slow the depreciation of the Rmb, the US Treasury calculated. The Rmb had fallen by 6.9 per cent against the dollar since August 2015, when the People’s Bank of China announced it would allow the currency to trade more freely, the Treasury said, but was still up 21 per cent against the dollar since December 2005. 

The US Treasury also added Switzerland to its watchlist but said the move came only because the size of the trading relationship had grown to a level where the country qualified as a major trading partner with the US. 

Also included on the watchlist are Germany, Japan, South Korea and Taiwan. 

But the US Treasury said that its analysis had concluded that no major trading partner of the US was now manipulating its exchange rate with the dollar in order to prevent any balance of payments adjustments or gain an unfair competitive advantage in international trade. 

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