The U.S. Treasury Department will submit before 15 April a semi-annual Report to Congress, which is expected to contain criticisms on its major trading partners’ foreign exchange policies. This may happen if and when the Trump Administration could identify currency manipulators that exploit exchange rates for their benefits in trade. Among such economies, observers are most concerned about the possibility that – given President Trump’s campaign rhetoric – the Mainland could be named a currency manipulator and trade activities between the world’s two largest economies would in turn be disrupted.
Thankfully, such worries were washed away when President Trump, in a recent interview with the Wall Street Journal, suggested that the Mainland would not be labelled a currency manipulator in the Report.
Three criteria
Indeed, the U.S. has no grounds for labelling the Mainland a currency manipulator to begin with. According to the Trade Facilitation and Trade Enforcement Act of 2015, there are three key criteria that it adopts to review if a major trading partner is a manipulator: 1
1) A significant bilateral trade surplus with the U.S. 2) A material current account surplus 3) Engaged in persistent one?sided intervention in the foreign exchange market
Arguably, the current nature of the Chinese economy only justifies checking one of the three boxes, and that is a significant bilateral trade surplus with the U.S. Based on the United Nations’ data, the trade deficit of the U.S. with the Mainland was around US$365 billion in 2016, representing some 2% of the country’s GDP2. This alone would not warrant the manipulator name calling.
On the other hand, as the Chinese economy has evolved over the years, its current account surplus is no longer “material” in both nominal and relative terms (see Chart 2). At its peak in 2007, the Mainland’s current account surplus represented 9.9% of the country’s GDP, which was far beyond the threshold of 3% established for the second criterion. Over time, the current account surplus has halved compared to its peak. Similarly, such a surplus has fallen below the threshold and is expected to represent only 1.6% of the country’s GDP in 2017. Therefore, the label of currency manipulator would not be justified under such conditions.
More importantly, while President Trump was concerned about the Mainland’s intention to depreciate its currency so as to give an upper hand to the country’s exports, the Mainland’s central bank has been engaging in actions to tame the depreciation pressure on RMB. This is partly operated through selling foreign assets, as reflected by the close to US$1 trillion drop in foreign reserve from its peak in June 2014 (see Chart 3). As a result, the earlier worries about the Mainland adopting a weak-RMB policy should prove to be invalid.
Conclusion
On the back of a higher assumed global growth rate (i.e. 2.3% in 2016 to 2.7% in 2017), the WTO forecasts that merchandise trade volume will grow 2.4% in 2017, up from a very weak 1.3% in 2016. The range of growth was also revised from 1.8-3.1% to 1.8-3.6%, showing some degree of optimism. With concerns about a trade war between the Mainland and the U.S. fading and economic growth projected to accelerate, the outlook of trade could be improving in the near term.
All in all, Hong Kong, as an externally oriented economy, should benefit from the removal of uncertainties.
[1] U.S. Department of the Treasury (Oct 2016) Report to Congress: “Foreign Exchange Policies of Major Trading Partners of the United States.
[2] Using data extracted from IMF’s database, which estimated the U.S. economic output to be US$18,561.93 billion in 2016.
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