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Late Report on Exchange Rate Policies Again Excludes China from Manipulator Designation

Wednesday, January 04, 2012
Sandler, Travis & Rosenberg Trade Report

In its semiannual report on foreign exchange rate policies released Dec. 27, 2011, the Treasury Department again declined to name China or any other major trading partner as a currency manipulator.

Treasury’s report reviews the exchange rate policies of 10 economies accounting for 70% of U.S. foreign trade. Foreign exchange markets have functioned well and in an orderly manner over the past year despite broader turmoil in the global economy, the report states, and real effective exchange rates for the major advanced economies are in line with historic norms. While all of the major advanced economies have fully flexible exchange rates, Japan twice intervened unilaterally in the past year, a notable change from recent practice. Among major emerging market economies, a select few have more tightly managed exchange rates, and the report calls for greater exchange rate flexibility in these economies.

The report cites several factors in support of its determination not to name China as a currency manipulator. One is that the estimated range of currency misalignment narrowed over the course of the past 18 months as the yuan appreciated against the dollar on a real, inflation-adjusted basis by nearly 12%. In fact, appreciation since China first initiated currency reform in 2005 is approaching 40%. Another consideration is that Chinese leaders have recently made commitments to “move more rapidly toward more market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals.” A decline in China’s current account surplus was also taken in account.

However, Treasury adds, “movement of the [yuan] to date is insufficient and more progress is needed.” The report reiterates the argument that allowing its exchange rate to continue to appreciate is in China’s own interests and that “a lack of continued appreciation by China would prevent the exchange rate from serving as a tool to encourage consumption so as to maintain strong, sustainable growth, further complicate the adjustment needed for broader financial sector reform, and undermine China’s stated goal of strengthening domestic demand.” Treasury states that it will continue to closely monitor the pace of appreciation of the yuan and “press for policy changes that yield greater exchange rate flexibility, level the playing field, and support a pronounced and sustained shift to domestic-demand led growth.”

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