The U.S. Treasury published its semi-annual foreign exchange report on October 15 and once again concluded that no major trading partner of the United States met the standard of manipulating the rate of exchange between their currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. Nevertheless, the report did make the following points:
– The government of China continues to intervene in foreign exchange markets and the RMB exchange rate remains significantly (5-10 percent) undervalued;
– The government of South Korea intervened in foreign exchange markets in 2014 to slow Won appreciation and the Won is now undervalued by about 6 percent; and
– Taiwan has been intervening in the market to prevent further appreciation.
The Treasury Report also presents data on reserves and the current accounts of select economies. China remains the top holder of foreign currencies with nearly $4 trillion and, as of July 2014, was on pace to account for two-thirds of net global reserve accumulation during 2014.
Table 1: Foreign Exchange Reserves, by Major Holders
[table id=43 /] Source: Report to Congress on International Economic and Exchange Rate Policies (Oct. 2014) at 10.
The report also presents data on national current account rebalancing from 2007 to 2013. As the figure below shows (scroll over the bars to view the data), Germany (+26 bil.), the Asian Newly Industrialized Economies (+100 bil.), and Oil Exporters (+$98 bil.) saw their surpluses increase, while the United States (+334 bil.) and EU Periphery countries (+$306 bil.) saw major improvements in their current accounts. On the other hand, Major Emerging Market Economies (-$212 bil.) and Other Deficit Countries (-$100 bil.) saw their current accounts deteriorate. China was the sole large surplus country to experience a large decline in its current account.
Figure 1: Change in Current Account Surpluses of Select Economies, 2007 to 2013Source: Report to Congress on International Economic and Exchange Rate Policies (Oct. 2014) at 32.
Notes: “S” denotes a surplus country/area; “D” denotes a deficit country/area.
Thus despite all the criticism, China through 2013 has been a significant contributor to international rebalancing. By the same token, Treasury’s analysis indicates this contribution would have been even larger if China had intervened less and allowed the RMB to appreciate even further.