China will not be cited as a currency manipulator - BBH

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, argues that US Treasury Secretary Mnuchin, attending his first G20 meeting, made some comments yesterday that seem to suggest that China will not be cited as a currency manipulator at the first opportunity to do so next month.

Key quotes

"At the insistence of Congress in the face of no country being cited as a manipulator for more than 20 years, the US Treasury Department, under the previous Secretary Lew, developed a quantifiable metric, that included having a large trade surplus with the US, a significant overall current account surplus,  and persistent intervention on one side of the market."

"Mnuchin indicated he is committed to the process and criteria he inherited, and will not pre-judge.  But we can.  China simply does not meet all of the criteria.  It does have a large bilateral trade surplus with the US (though it may be a bit smaller if one were to exclude exports by US-owned affiliates in China to the US).  Its current account surplus as less than 2% of GDP in 2016, down from 3% in 2015.  By way of comparison, Germany's current account surplus was 8.4% in 2015 and 8.6% last year.  Japan's current account surplus was 3.3% of GDP in 2015 and fell to 2.7% in 2016.  Note too Japan's current account surplus is driven by its investment income not trade."

"The PBOC does appear to have intervened actively, though the IMF (and others) have called on it to be more transparent in its operations.  However, the intervention is aimed at slowing the pace of depreciation.  It has lost about one trillion dollars in reserves trying to offset or smooth the capital outflows (some of the decline is due to valuation and specifically the decline of the euro since mid-2014)."

"Lastly, there had been some talk that the Trump Administration would pivot away from "manipulation" criteria to a focus on valuation.  Such a shift, however, would likely be more important for German, and maybe some emerging market currencies, like Korea and Taiwan, but it might not bolster the case to intensify pressure on China.  When China joined the SDR formally at the end of last year, the IMF argued that in its assessment that yuan was no longer undervalued.  Given the debt, and housing "bubble" some economists see the yuan over-valued."