Photographer: Qilai Shen/Bloomberg

U.S. Puts China, Japan on New Watch List for FX Practices

  • Germany, South Korea, Taiwan also placed on monitoring list
  • Treasury says China's yuan should appreciate over medium term

The U.S. put economies including China, Japan and Germany on a new currency watch list, saying their foreign-exchange practices bear close monitoring to gauge whether they provide an unfair trade advantage over America.

The inaugural list also includes South Korea and Taiwan, the Treasury Department said Friday in a revamped version of its semi-annual report on the foreign-exchange policies of major U.S. trading partners. The five economies met two of the three criteria used to judge unfair practices under a February law that seeks to enforce U.S. trade interests. Meeting all three would trigger action by the president to enter discussions with the country and seek potential penalties.

The new scrutiny of some of the world’s biggest economies comes amid a bruising presidential campaign in which candidates from both the Democratic and Republican parties have questioned the merits of free trade. Republican front-runner Donald Trump has promised to declare China a currency manipulator, and the latest report may fail to appease critics in Congress who say China’s practices have cost American manufacturing jobs.

“We will continue to watch this process closely to ensure that the president squarely addresses currency manipulation and stands up for the American people,” House Ways and Means Chairman Kevin Brady, a Texas Republican, said in a statement on the Treasury report.

The Treasury had already been monitoring countries for evidence of currency manipulation under a 1988 law. In the latest report, the department concluded that no major trading partner qualified as a currency manipulator; the last country it labeled as such was China, in 1994.

Under the new law, Treasury officials developed three criteria to decide if countries are being unfair: an economy having a trade surplus with the U.S. above $20 billion; having a current-account surplus amounting to more than 3 percent of its gross-domestic product; and one that repeatedly depreciates its currency by buying foreign assets equivalent to 2 percent of output over the year.

China, Japan, Germany and South Korea were flagged as a result of their trade and current-account surpluses, the department said. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury.

Financing Cutoff

If a country meets all three criteria, it could eventually be cut off from some U.S. development financing and excluded from U.S. government contracts.

“People in Congress who passed this law were very frustrated because they felt they’d never had an adequate explanation from Treasury why some countries weren’t found to be manipulating,” said Nicholas Lardy, a scholar at the Peterson Institute for International Economics who has studied China for more than three decades. “Congress tried to be specific so the Treasury has less discretion.”

Lawmakers working on the trade bill originally sought to include tougher penalties, such as tariffs, for currency manipulators. But the Obama administration opposed that part and it was eventually dropped.

In its report, the Treasury said China’s yuan “should continue to experience real appreciation over the medium term.” In the department’s last report, in October, it said the yuan was “below its appropriate medium-term valuation.” Before that, the department had said the yuan was “significantly undervalued,” a description it avoided again Friday.

The Treasury said more clarity from China on its exchange-rate goals, including its commitment not to devalue its currency to boost growth, would help stabilize the market. The yuan has depreciated 4 percent against the dollar over the last year, even as the Treasury estimated China has sold $480 billion of foreign-exchange assets from August through March to support the currency.

The Treasury said it’s increasingly important that Japan use all policy levers, including fiscal policy and structural reforms, to lift growth. Earlier in April, Treasury Secretary Jacob J. Lew urged Japan to focus on boosting domestic demand instead of exports as the yen rises. The yen has climbed almost 13 percent this year against the dollar.

Orderly Market

Current conditions in the dollar-yen market are orderly, and it’s important for countries to keep their Group of Seven and Group of 20 currency commitments, the Treasury said, reiterating Lew comments that were seen as rebuffing Japan’s desire to potentially weaken the yen through intervention.

South Korea sold about $26 billion in foreign exchange from the second half of last year through March to prop up the won, the Treasury noted, saying the intervention represented a shift from efforts to depreciate the currency. “Appreciation of the won over the medium term would help Korea orient its economy away from its current reliance on exports,” the department said.

Germany has the second-largest current-account surplus in the world, and the excess saving could be used to boost growth in the euro area, the Treasury said.

The Taiwanese government should limit currency interventions to the “exceptional circumstances of disorderly market conditions, as well as increase the transparency of reserve holdings and foreign-exchange market intervention,” the Treasury said.

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