The Treasury's currency report was all about China.

For the fourth time, the Treasury department has denied President Trump what he wants: to label China as a currency manipulator.

In fact, in its most recent report on the exchange rate policies of America's largest trading partners, the Treasury declined to name China, or any country for that matter, a currency manipulator. Instead, as it did in April, six countries made the monitoring list: China, Japan, Korea, India, Germany, and Switzerland.

While the results remained the same, the Treasury toughened up its language on China and signalled the potential for further escalation later down the road.

But first, two points on spacing and coverage. Instead of giving a broad overview of the findings in the executive summary, as it has done in the past, the Treasury made clear the focus of this report right from the start: China. It zeroed in on China's imbalances and its protracted history of currency intervention, including lines like this:

Thus, since the 1988 Act was passed, China’s exchange rate and intervention practices promoted and sustained a significant undervaluation of the RMB for much of this period, imposing significant and long-lasting hardship on American workers and companies. 

But also made concessions like this:

While China’s exchange rate practices continue to lack transparency, including its intervention in foreign exchange markets and its management of daily central parity settings to influence the value of the RMB, Treasury estimates that direct intervention by the People’s Bank of China (PBoC) this year has been limited. 

With regards to coverage, the report once again centred solely on America's 12-largest (plus Switzerland) trading partners. Given that many smaller countries around the world have manipulated their currencies on a more consistent basis in recent months (Vietnam and Thailand, for instance) the Treasury indicated that by keeping the list narrow, the only manipulation it really seems to care about at the moment is China's.

Now on to the language. The Treasury specifically called out China for not doing enough over the summer to stem the currency's depreciation. Since mid-June, the renminbi has weakened more than 7 per cent against the dollar, and nearly 6 per cent on a trade-weighted basis. In the Treasury's eyes, it used only “limited tools” to prop up the currency:

Broader proxies for intervention indicate there have been modest foreign exchange sales recently by state banks, helping stem depreciation pressures, though it is clear that China is not resisting depreciation through intervention as it had in the recent past. 

Even more notable, perhaps, is the Treasury's indication that it may not necessarily mind intervention so long as it is “symmetrical,” meaning countries stem depreciation with as much gusto as they stem appreciation. Here's that passage:

Treasury will also be monitoring closely the extent to which intervention by our trading partners in foreign exchange markets is symmetrical, and whether economies that choose to “smooth” exchange rate movements resist depreciation pressure in the same manner as appreciation pressure.

It also added a new criteria, which specifically targets China:

As a further measure, this Administration will add and retain on the monitoring list any major trading partner that accounts for a large and disproportionate share of the overall US trade deficit even if that economy has not met two of the three criteria from the 2015 Act.

That means China, with its $390bn goods trade surplus with the US, will probably remain on the monitoring list (or worse) in perpetuity. Moreover, points out Stephanie Segal at the Washington-based CSIS, by adding this line, “the Treasury makes it known that the sole basis for labelling a country is not just limited to these three criteria. It's more subjective than that.”

Lastly, the Treasury included this warning:

Treasury is concerned about the depreciation of the RMB and will carefully monitor and review this determination over the following 6-month period, including through ongoing discussions with the PBoC. 

Taking all of this together, the Treasury has effectively dialled up the language by “multiple notches,” says Calvin Tse of Citigroup. More broadly, he adds, “the singling out of China suggests that the US Administration stands ready to do more on China should discussions between Trump and Xi not bear fruit at the G20 next month.”

We know another $267bn of tariffs are on the docket for China. The Treasury's next currency report could now be in play.

Related Links:
If the Treasury names China a currency manipulator, it's purely political — FT Alphaville
Manipulation on the Mind — FT Alphaville
China isn't weaponising its currency (yet) — FT Alphaville

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