Chinese yuan banknotes and coins sit in a vendor’s drawer at a fresh produce market in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Treasury’s Currency Report Seen as China's Final Warning

(Bloomberg) -- While the U.S. Treasury stopped short of labeling China a currency manipulator in its latest semiannual report, the department’s sharpened language didn’t escape the foreign-exchange market’s notice.

In a break from recent releases, Treasury devoted a section Wednesday to outlining concerns with China’s bilateral trade surplus and said the U.S. was “deeply disappointed” that the Asian nation doesn’t disclose its FX interventions. The department also cautioned that it will be monitoring whether countries “resist depreciation pressure in the same manner as appreciation pressure.”

The focus on China portends more turbulence ahead for financial markets, according to ING Groep NV. The Chinese yuan slid Thursday in a move that some market participants expect to continue. Given the currency’s role in determining global risk sentiment, emerging-market currencies may be poised for more pain, said ING currency strategist Viraj Patel.

Treasury’s Currency Report Seen as China's Final Warning

“The latest Treasury report came across as basically a final warning over Beijing’s currency policy,” London-based wrote Patel in an email. “The currency pair is fast turning into a bargaining chip in U.S.-China trade talks, and that makes us nervous.”

The offshore yuan fell 0.1 percent to 6.9395 per dollar on Thursday, its weakest closing level since January 2017. A break beyond the psychological 7.0 level would likely spell trouble for other Asian currencies, Patel said.

Regional Laggard

The yuan has declined about 10 percent against the greenback in the past six months, trailing many Asian peers. The cheapening has drawn the ire of U.S. President Donald Trump and fueled speculation that China is deliberately weakening its currency as trade relations between the two nations sour.

October’s report “lays the groundwork for giving Treasury the option of naming China next time for failing to intervene to block depreciation pressure with sufficient force,” according to Brad Setser, a former Treasury official. “My guess is that the White House might say Treasury should name China if the bilateral deficit keeps growing and China doesn’t resist depreciation pressures.”

While formally naming China a manipulator wouldn’t have triggered immediate sanctions or other U.S. penalties, it would have further soured an already tense relationship between the world’s two largest economies.