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Trump's Yuan Manipulation Views Don't Tick All Treasury's Boxes

China’s current account surplus was 1.89% of GDP, as of the end of last year.

Trump's Yuan Manipulation Views Don't Tick All Treasury's Boxes
U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

(Bloomberg) -- While President Donald Trump’s personal view is that China is manipulating its currency for a trade advantage, his Treasury will make an official determination next month.

The department’s semiannual report on foreign-currency practices, due around mid-April, uses three criteria to decide whether a major trading partner is manipulating its currency. As of the last report in October, no one fit that designation though China and five other economies are on a watch list, which began in 2016.

Taking an informal peek ahead to April’s assessment -- based on Treasury’s scoring system using recent Chinese and U.S. government data -- it appears China is moving a little further away from the legal definition of a currency manipulator. The numbers indicate China may still only meet one of the three conditions, the same as the October report.

Let’s look at Treasury’s criteria for currency manipulation to see where China stands.

1. A large bilateral trade surplus with the U.S?

Yes, but it’s narrowing. As America’s biggest trading partner, China is running a trade surplus well above the $20 billion threshold set out in the Treasury criteria. Nonetheless, based on Treasury’s own calculation of 12-month trailing data, the U.S. trade gap with China eased last year. As of January, the deficit dropped to $349.4 billion -- near the lowest in two years -- compared with the $356.1 billion level cited in Treasury’s last report in October.

Trump's Yuan Manipulation Views Don't Tick All Treasury's Boxes

2. A current account surplus of more than 3% of GDP?

No. As of the end of last year, China’s current account surplus was 1.89 percent of gross domestic product -- the lowest level since June 2014 and down from a peak of more than 10 percent of GDP in 2007.

Trump's Yuan Manipulation Views Don't Tick All Treasury's Boxes

3. Buy foreign assets of 2% of output to weaken currency?

No. China has been selling its foreign-exchange assets to support the yuan. According to China’s State Administration of Foreign Exchange, the country last year used $320 billion in foreign-exchange reserves, which are sitting near a six-year low of just about $3 trillion.

Trump's Yuan Manipulation Views Don't Tick All Treasury's Boxes

"It would be hard for the U.S. to use only one of the arguments to conclude that China has been a currency manipulator for last 12 to 18 months," Jorge Mariscal, emerging-market chief investment officer at UBS Wealth Management, said in an interview. "The evidence is not there."

That backs the view of S&P Global Ratings, which said in a report this month that China shows the least evidence of currency manipulation in Asia.

Still, when it comes to currency manipulation, it has never been as simple as just a technical analysis. While Treasury Secretary Steven Mnuchin has signaled no urgency to brand China a manipulator, Trump in February described it as the “grand champion” at manipulation.

The goalposts could shift: Treasury has the flexibility to alter the terms of its assessment. The department says it will continue to review the factors it uses to assess the criteria, to ensure the reporting and monitoring tools meet the objective of indicating where unfair currency practices may be emerging.

"The U.S. Treasury might change the rhetoric in the upcoming semi-annual foreign-exchange review report and even modify the standards,” said Wu Qing, of China’s Development Research Center of the State Council. “But even in the worst case that the U.S. puts currency issues on the table, it is not the end of the world for China -- it might help to push China to accelerate FX reform."

Bigger Issue

Muchin's immediate predecessor, Jacob Lew, for his part anticipates that currency issues won't be a major focus in bilateral relations, even as his former department prepares for the report that's technically due April 15. Excess production levels are a bigger issue, he said at an event in New York Wednesday.

Up to this point, Trump hasn’t publicly backed up his harsh rhetoric on China with punishing tariffs or an immediate designation as currency manipulator. That could be an indication the Trump administration will take a more nuanced approach to its America First trade agenda with the world's second-largest economy. The Treasury department's press office didn't respond to an emailed request for comment.

"It’s true the administration has proved unexpectedly cautious about China -- and China cautious about Trump," said William Reinsch, a fellow at the Stimson Center and former vice chairman of United States-China Economic and Security Review Commission. "So I hesitate to predict the chances for a currency-manipulation decision, or at least one that China critics would like to see."

To contact the author of this story: Lillian Chen in New York at lchen400@bloomberg.net.

To contact the editor responsible for this story: Sarah McGregor at smcgregor5@bloomberg.net, Mark Tannenbaum