US Treasury removes designation of China as currency manipulator

The United States Treasury Department on Monday said China should no longer be designated a currency manipulator in a long-delayed semi-annual currency report, reversing its August finding, which had roiled financial markets.

The widely expected decision came as a high-level Chinese delegation arrived in Washington before Wednesday’s signing of a Phase I trade agreement. The goal of the deal is to ease tensions between the world’s two largest economies after more than 18 months of tit-for-tat tariffs that have weighed on global growth.

The offshore-traded yuan reached five-month highs earlier on Monday amid heavy demand ahead of the expected signing. It extended those gains into Tuesday trading in Asia, strengthening past 6.88 yuan per US dollar to a high of 6.8745, its strongest level since July 26, 2019. 

The Treasury Department designation in August was the first time since 1994 that the US had determined China was manipulating its currency, accusing China of creating an unfair competitive trade advantage.

In its latest report, the Treasury said China had made “enforceable commitments to refrain from competitive devaluation” and agreed to publish relevant data on exchange rates and external balances as part of the Phase 1 trade deal.

The report said the Chinese yuan – after depreciating as far as 7.18 yuan to the US dollar in early September – had appreciated in October and was currently trading at about 6.93 yuan to the dollar.

“In this context, Treasury has determined that China should no longer be designated as a currency manipulator at this time,” the report said.

It said, however, China should take decisive steps to avoid a persistently weak currency and allow greater market openness to strengthen its long-term growth prospects.

The Treasury report also cited continued concerns about the currency practices of eight other countries – Germany, Ireland, Italy, Japan, Malaysia, Singapore, South Korea, and Vietnam – and added a ninth, Switzerland, to its list.

It raised particular concerns about Germany, the world’s fourth-largest economy, which has the world’s largest current account surplus and is currently slipping into recession. It said the German government had a responsibility to undertake tax cuts and boost domestic investment.

The Treasury report said the continued strength of the US dollar was “concerning,” given the IMF’s judgement that the dollar was overvalued on a real effective basis.

It said the real dollar remains about 8 percent above its 20-year average, noting that sustained dollar strength would likely exacerbate persistent trade and current account imbalances.

‘It should never have happened’

Mark Sobel, a former senior Treasury official and adviser to the London-based OMFIF economy policy think-tank, welcomed the Treasury’s move, and said China “was errantly designated at a moment of presidential pique.”

“It should never have happened in the first place,” he said. “China manages, but does not manipulate its currency.”

Sobel said China’s current account surplus was small as a share of gross domestic product and it had not intervened in currency markets for years. The August move came at a time when the yuan had fallen against the dollar because of market apprehension about Trump’s “ratcheting up of trade tariffs,” he said.

US Senate Democratic leader Chuck Schumer, a fierce critic of China’s currency and trade practices, harshly criticised the Trump administration for its decision to “back down” from labelling China as a currency manipulator.

“China is a currency manipulator – that is a fact,” Schumer said in a statement released by his office. “Unfortunately, President Trump would rather cave to President Xi (Jinping) than stay tough on China.”