Treasury Says China not a Currency Manipulator, but Yuan Undervalued
On July 8, 2010, the Treasury Department sent its Semi-Annual Report on International Economic and Exchange Rate Policies1 to Congress, which concludes that China’s renminbi (or yuan) remains undervalued but does not conclude that China is a “currency manipulator.”
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(Note that the report was due in April but Treasury delayed its publication, pending the outcome of the G-20 meetings and the Strategic and Economic Dialogue with China. See ITT’s Online Archives or 04/05/10 and 06/11/10 news, 10040505 and 10061124, for BP summaries on the delay and on Senators pushing for Treasury to take action against China and publish the report.)
No Trading Partner Given “Currency Manipulator” Title
Treasury has concluded that no major U.S. trading partner, including China, met the statutory standard2 to be deemed a “currency manipulator” during the period covered in the report.3
China’s Renminbi Remains Undervalued
However, the report concludes that China’s renminbi remains undervalued as evidenced by the country’s continued foreign reserve accumulation, the limited appreciation of China's real effective exchange rate relative to rapid productivity growth in the traded goods sector, and the persistence of current account surpluses even during a period when China's trading partners were in deep recession.
Will Take Time to Assess China’s Announced End of Dollar Peg
The report states that it will take time to assess whether China’s June 2010 announcement that it was ending its peg to the dollar and returning to a more flexible, market-based exchange rate regime will produce a sufficiently market-determined exchange rate to correct the undervaluation.
(Treasury notes that the last time the Chinese authorities allowed the exchange rate to move in response to market forces (between July 2005 and July 2008), the Chinese currency appreciated 21.2% against the dollar.)
Treasury to Report to Congress on Renminbi in Fall
Treasury will closely monitor closely the pace of the renminbi’s appreciation, and will report on progress in the fall.
Report Also Discusses Global Economy, Need for Increased Demand, Etc.
The report also covered 16 other currencies4 and provided general economic analysis of the period of review. Among other things, it states the following:
Emerging markets recovering quicker. The report concludes that emerging market economies have recovered more quickly than most advanced economies from the economic downturn of 2008-2009. Economies in Asia, but also some in Latin America (Brazil for example) have performed especially well. Some emerging market economies have begun to scale back their macroeconomic stimulus.
China’s stimulus helped U.S. exports. China was a significant source of economic support in 2009, generating a 13% increase in domestic demand that contributed 1.6 percentage points to global growth at a time when total world demand declined 0.6%. China’s stimulus contributed to the expansion of U.S. exports to China by 15% in the second half of 2009, while U.S. exports to the rest of the world decreased by 13%.
Europe & Japan slow to recover, need to increase demand. Some economies, notably in Europe, are recovering more slowly. The IMF is forecasting economic growth of 1.0% in the euro area in 2010 and 2.4% in Japan. Much of this projected growth is expected to be export driven, as private sector demand continues to be weak, particularly in Japan and Germany, two economies with large external surpluses. Both economies need to focus on reforms that strengthen private sector demand growth, to contribute to a better balanced and more sustainable global economy.
1The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to provide semiannual reports on the international economic and exchange rate policies of the major trading partners of the U.S.
2Under Section 3004 of the Omnibus Trade and Competitiveness Act of 1988, Treasury must consider “whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
3The period covered in this Report is July 1, 2009 to December 31, 2009, but information from the first half of 2010 also is included when available and where relevant.
4India, Japan, Malaysia, Singapore, South Korea, Taiwan, Euro area, Norway, Russia, Switzerland, United Kingdom, Saudi Arabia, Brazil, Canada, Mexico, and Venezuela.
(See ITT’s Online Archives or 04/17/09 news, [Rerf:09042725], for BP summary of Treasury’s April 2009 report to Congress on international exchange rate policies which also concluded China was not manipulating its currency.)
Treasury press release (dated 07/08/10) available here.