Chna not a currency manipulator, U.S. says

AFP | Minutes from the Federal Reserve's latest policy meeting show the central bank will continue to hike interest rates

To be labeled a currency manipulator by the USA, a trading partner must qualify three conditions: bilateral trade surplus of at least 20 billion dollars, current account surplus of at least three percent of gross domestic product (GDP), and a so-called "persistent, one-sided intervention" where net purchases of foreign currency total at least two percent of GDP over a year.

The six major trading partners on the Treasury monitoring list for currency practices are China, Japan, Republic of Korea, India, Germany and Switzerland.

Washington and Beijing are locked in a battle over the yawning US-China trade deficit, which Trump describes as a job killer. "They might be gaming the tariffs", said Chandler.

China's foreign ministry welcomed the report and said it reflected "common sense and the consensus of the worldwide community".

Chandler said China does not meet all of the criteria to be called a currency manipulator. Still, Treasury is critical of Beijing for not pursuing more market-based reforms that could bolster confidence in the renminbi, that has depreciated significantly. China has retaliated, sparking a trade war between the world's two biggest economies.

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Noting that the recent depreciation of the RMB will likely exacerbate China's large bilateral trade surplus with the USA, as well as its overall trade surplus, the report said Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China's exchange rate for competitive purposes. That would raise borrowing costs at a time when communist leaders are trying to shore up cooling growth. It seems geared towards encouraging more widespread use of the yuan for transactions and central-bank reserves while guarding against panic-selling and herd behaviour in trading of the currency.

President Donald Trump promised throughout the campaign to label China a currency manipulator once he got into office, but so far he has declined to do so.

While China's exchange rate practices continue to lack transparency, Treasury estimates that direct intervention by the People's Bank of China this year has been limited. The increased foreign holdings come ahead of the anticipated inclusion of Chinese government and policy-bank bonds in global bond market indices from next April.

The "president has gone postal, escalating US-China tensions and a stronger dollar will pose considerable headwinds to local equity markets", warned Stephen Innes, head of Asia-Pacific trading at OANDA. The central bank also said it could sell short-term yuan-denominated securities in Hong Kong to tighten yuan liquidity, which would have the effect of supporting the value of the currency in offshore markets. Gao Qi, FX strategist at Scotiabank, indicated he expects the yuan to keep weakening, saying it would "likely continue trading with a 6.95 resistance" following the Treasury decision.

If an economy meets all three criteria, the United States will negotiate with its government and may impose retaliatory measures, while if only two are present, it is consigned to the exchange rate policy monitoring list. The currency temporarily steadied but fell the following year.

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