WASHINGTON • The US Treasury Department stopped short of declaring China a currency manipulator in its semi-annual report on foreign exchange rates, averting an escalation of a trade war while serving notice that the US will closely watch the yuan after its recent slide.
"Of particular concern are China's lack of currency transparency and the recent weakness in its currency," Treasury Secretary Steven Mnuchin said in a statement. "We will continue to monitor and review China's currency practices, including through ongoing discussions with the People's Bank of China."
While the Treasury said in the report that direct intervention by China's central bank has recently been "limited", the United States is "deeply disappointed" that the nation does not disclose its foreign exchange intervention.
No major trade partner was designated a currency manipulator, according to the report, which was released on Wednesday by the Treasury. Still, the department dialled up criticism of China's state-driven economic model.
"Real exchange rate movements in 2018 - particularly the strengthening of the dollar and the decline in China's currency - would, if sustained, exacerbate persistent trade and current account imbalances," according to the report.
The Treasury said China's economic model, "which continues to rely significantly on non-market mechanisms, is posing growing risks to the long-term global growth outlook".
The US has not officially designated another country a manipulator since it assigned that label to China in 1994. Doing so is supposed to prompt negotiations to resolve the problem.
The decision not to label China a manipulator this time stands in contrast with public comments made by President Donald Trump, who has repeatedly accused China of gaming the value of the yuan to gain an advantage in trade.
WHAT THE LABEL MEANS
What is a currency manipulator?
Three conditions have to be met before China is formally labelled a currency manipulator. They include:
• A minimum US$20 billion (S$27.6 billion) trade surplus with the US,
• A current account surplus in excess of 3 per cent of gross domestic product,
• Repeated interventions in currency markets.
What happens if China is declared a currency manipulator?
Formally declaring China a manipulator would not trigger sanctions or other US penalties, but is meant to prompt negotiations to resolve the problem.
Which countries are now on the US Treasury's watch list for potential manipulation?
China, Japan, South Korea, India, Germany and Switzerland.
While formally declaring China a manipulator would not have triggered sanctions or other US penalties, it would have worsened an already tense relationship between the world's two biggest economies.
Mr Trump has slapped tariffs on US$250 billion (S$344.3 billion) in Chinese goods, and China has retaliated with tariffs on about US$110 billion of US products.
On top of the escalating trade war, Mr Trump recently accused China of meddling in the 2016 presidential election, as well as the upcoming mid-terms next month. Earlier on Wednesday, he said he plans to withdraw from an agreement that allows Chinese shippers to send products to the US at discounted rates.
Mr Mnuchin has said since July that the Treasury is concerned about the yuan's recent drop.
The currency has slid about 9 per cent against the dollar in the last six months, making it one of the worst-performing Asian currencies this year and raising speculation that China has been deliberately weakening its currency as trade tensions with the US worsen.
Mr Mnuchin determined in the report released on Wednesday that China has not crossed three thresholds set by Congress that determine whether a country should be formally designated a currency manipulator. They include a minimum US$20 billion trade surplus with the US; a current account surplus in excess of 3 per cent of gross domestic product; and repeated interventions in currency markets.
"If they'd found a way to label China, it would have hurt sentiment further," said Mr Shahab Jalinoos, Credit Suisse Group AG's global head of foreign exchange trading strategy. "But this being a yawn, if anything, it should make markets more comfortable" with emerging market risk.
The Treasury's currency watch list remained the same, naming China, Japan, South Korea, India, Germany and Switzerland.
Mr Trump and President Xi Jinping of China are expected to meet in Argentina next month at the Group of 20 summit. The prospect of a face-to-face meeting between the leaders has raised hopes that there could be a breakthrough in the trade dispute.
SEE EDITORIAL: US policies lie at heart of currency woes