Focus on U.S. Immigration and Economic Perspectives: Hong Kong media reported on October 20 that the U.S. Department of the Treasury stated in its semi-annual foreign exchange policy report on October 19 that the renminbi remains "below its appropriate medium-term valuation." The report notes that the "core factors" that have driven the appreciation of the renminbi in recent years still exist, such as a large and growing current account surplus and net inflows of foreign direct investment.
Nevertheless, the U.S. Treasury Department no longer described the renminbi as "significantly undervalued," abandoning the language it had used in reports since May 2012. The U.S. Treasury also acknowledged that market forces have placed downward pressure on the renminbi, though it indicated this trend is temporary. Meanwhile, the International Monetary Fund concluded in May that the renminbi is "no longer undervalued."
This is the first foreign exchange policy report issued by the Obama administration since the People's Bank of China unexpectedly devalued the renminbi on August 11, which led to the currency's largest two-day decline since 1994. The report shows that the U.S. stance on China's exchange rate policy has softened. The People's Bank of China previously stated that it would allow market forces to play a greater role in setting the daily central parity rate of the renminbi.
The U.S. Treasury Department stated that the test for China's new exchange rate mechanism will lie in whether China allows the renminbi to respond as flexibly to upward pressure as it did to downward pressure. The Treasury Department indicated that it is crucial for China to adhere to its commitment to intervene in the foreign exchange market only under "disorderly market conditions."
The U.S. stated that China has intervened heavily in the foreign exchange market over the past three months, spending approximately $229 billion to prevent the renminbi from depreciating. The Treasury Department said China should disclose its foreign exchange intervention actions on a regular basis.
In its report released on October 20, the U.S. Treasury Department concluded that no major trading partner met the criteria for being labeled a currency manipulator.
Under a 1988 law, the U.S. Treasury Department is required to submit a report to the U.S. Congress twice a year regarding international economic developments and exchange rate policies. The U.S. Treasury must engage in direct talks with any country deemed to be manipulating its exchange rate and seek to resolve the issue through the IMF. The last country designated a currency manipulator was China, in 1994.
The Bloomberg Dollar Spot Index shows that the U.S. dollar has appreciated by 12.2% over the past year. During the same period, the renminbi fell 3.7% against the dollar.
China is currently seeking IMF approval to include the renminbi in its reserve currency basket. The IMF is expected to reach a decision before the end of the year.