The US Treasury released its latest foreign exchange report last week. It has not garnered much excitement. Dollar strength poses a bigger foreign exchange question for the current international economic juncture than other currencies, but the report does not devote enough discussion to this. Further, the external positions of key surplus countries raise more nettlesome structural bugs than foreign exchange developments.
Nonetheless, several salient themes are well explored, while other parts miss their mark. What are the hits and misses?
The hits
The first hit is the Treasury’s discussion of the Chinese economy and external position. The report documents China’s efforts to resist renminbi depreciation against the dollar and offers standard suggestions – echoed by analysts in and out of China – on how China can rebalance its economy from state-led investment and external reliance/overcapacity to domestic consumerism and services. Perhaps the third plenum of China’s 20th Central Committee will hear the chorus.
The discussion is strongest in delving into the quality and growing discrepancies of China’s external data, raising the question of whether the country’s surpluses are larger than reported. Though the analysis will not satisfy diehard China balance of payments students, the Treasury sets forth the basic problems in wading through the customs versus BoP data.
There is little reason to assume that China is intervening in the renminbi market to any considerable degree. It is relying on signalling and administrative measures to resist renminbi depreciation. If China is intervening, it could be that it is selling dollars. In discussing renminbi developments, the Treasury rightfully returns again to confusion over Chinese reserve and intervention data, highlighting the opacity of Chinese currency practices.
On Chinese BoP and currency issues, the International Monetary Fund should be primed to dig deeply. The IMF commented on customs versus BoP data in response to a question at its China Article IV Consultation press conference in May, though the concluding mission statement had little to say about China’s external accounts. The IMF’s seeming call for renminbi depreciation could be enormously counterproductive from a political economy standpoint.
Much focus is now on European political and electoral developments, European Union tensions with China given US-China stresses and the sluggish economic recovery. Amid these developments, global attention has passed by the enormity of Germany’s excessive current account surplus. The Treasury’s report will hopefully begin to reverse this trend. It discusses – too briefly – some of the structural determinants of Germany’s large surpluses, including low investment, and also too tamely and diplomatically argues that the country’s debt brake will stifle much-needed investment.
While the Treasury’s focus on Vietnam may seem obsessive – especially as its surpluses may be influenced by reshoring out of China, which presumably the US should see as a positive – the discussion of the lack of transparency in Vietnam’s foreign exchange and reserve practices is well developed. That focus complements the discussion on the lack of Chinese foreign exchange transparency. The Treasury merits praise for its generalised push on enhancing foreign exchange transparency. The IMF should vocally follow suit.
The misses
Japan rejoining the ‘monitoring list’ has generated headlines. That should raise questions about the Treasury’s overly quantitative evaluation of major trading partners. If a country’s current account is too material, intervention too large and bilateral surplus too significant, breaching two out of these three automatically puts a country on the ‘monitoring list’ – except China, which is ‘monitored’ no matter what.
The yen is weighed down by large rate differentials versus the US. Japanese monetary policy is gradually tightening but remains accommodative – and appropriately so as the Treasury well knows. Japan has also been intervening to stem downward currency pressures. But Japan’s actions are overshadowed by US developments and the yen is likely to remain weak until US rates decline significantly. What will the Treasury ‘monitor’?
The significance of bilateral balances is economically dubious, though difficult to overlook given domestic politics and the foreign exchange report statutes. But the Treasury’s threshold for a large bilateral surplus is $15bn – tantamount to a miniscule 0.05% of US gross domestic product. The Treasury should at least raise the threshold, if not consider dropping the equal weight of bilateral balances with the other two criteria and instead invoke it more as a qualitative factor.
The Treasury’s report has a good discussion of US and global economic developments, foreign exchange reserves and market movements. Yet, dollar strength should have had a much greater focus. The report immodestly praises US growth and its role in sustaining global activity. What’s lacking, though, is a forthcoming linkage of higher US interest rates and the policy mix in strongly bolstering the dollar on exchange markets, contributing to US current account imbalances and acting as a backdrop for protectionist forces.
On balance, the latest report – even if it might not keep one awake – underscores important themes that merit the international monetary and financial community’s fuller attention.
Mark Sobel is US Chair of OMFIF.
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2024-06-26 14:27:23Z
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