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US balks at branding China a ‘currency manipulator’

The US Treasury warned China that it is closely scrutinising its foreign exchange and trade practices after past interventions caused “significant and long-lasting hardship” for American workers. But it declined to brand the country a currency manipulator despite Donald Trump’s campaign pledges. 

The Treasury’s twice-annual report on foreign exchange policies lashed the People’s Republic for its “long track record of engaging in persistent, large-scale, one-way foreign exchange intervention” but acknowledged that its more recent practices have aimed to prevent excessive depreciation in its exchange rate. 

The Treasury called on Beijing to prove that its change in foreign exchange strategy represents a “durable policy shift”.

It added: “China continues to pursue a wide array of policies that limit market access for imported goods and services, and maintains a restrictive investment regime which adversely affects foreign investors.” 

Mr Trump pledged before the inauguration to brand China a currency manipulator on day one of his presidency but, earlier this week, he retreated from the vow as he acknowledged that Beijing’s foreign exchange practices had changed. He has also hinted at concessions on his trade agenda if Beijing did more to support America on North Korea. 

The Trump administration’s currency U-turn has been welcomed by officials and economists but it risks triggering a backlash from supporters who were drawn by the president’s attacks on a country he once dubbed a “grand champion” of currency manipulation. 

In its report, the Treasury acknowledged that China’s trade and current account surpluses narrowed in 2016, and that its currency was under “downward pressure throughout the year” as a result of capital outflows estimated at $700bn. 

However, it also added: “Treasury is concerned by the lack of progress made in reducing the bilateral trade surplus with the United States.”

The Treasury’s report declined to tag any country with the currency manipulator label, while maintaining six countries on a list for close monitoring: China, Japan, Korea, Taiwan, Germany and Switzerland.

It acknowledged a trend towards reduced currency interventions in the past two years, but it left open the possibility that this was merely an opportunistic response to changing capital flows. 

“The current global configuration of external positions, in which there are pockets of extremely large trade and current account surpluses, is untenable,” the Treasury said.

“The United States cannot and will not bear the burden of an international trading system that unfairly disadvantages our exports and unfairly advantages the exports of our trading partners through artificially distorted exchange rates.” 

In its analysis, the Treasury notified South Korea that it was “closely monitoring” its currency intervention practices, noting a track record of “asymmetric foreign exchange interventions”.

It told Taiwan that it needed to prove that it was undergoing a “durable shift” towards reduced interventions. Germany was urged to loosen fiscal policy to bolster domestic demand and push up the euro’s nominal and real effective exchange rates. 

Trump administration officials have been particularly tough in their criticism of Berlin’s economic policies in the past.

Peter Navarro, one of the president’s trade advisers, has accused Germany of exploiting a “grossly undervalued” euro to take advantage of the US and other trading partners.

In its report, the Treasury said: “Germany’s bilateral trade surplus with the United States is also very sizeable and a matter of concern for Treasury.”