US-China currency deal underwhelms
The US-China trade deal includes a foreign-exchange agreement that reaffirms the two countries’ commitments to avoid competitive devaluations. Currency watchers are mostly unimpressed, however.
The two-page currency chapter of the accord signed in Washington last Wednesday lays out an enforcement mechanism if either side fails to adhere to International Monetary Fund and Group of 20 commitments.
The US and China agreed to publicly disclose data, including foreign-exchange reserves and figures on imports and exports, as proof that neither side is manipulating exchange rates. But the general take from most analysts was that it offered little news on the currency front.
“It still remains to be seen on enforcement of the exchangerate component and the deal overall,” said Torsten Slok, chief economist at Deutsche Bank. “So we have to stay tuned with regard to the yuan.”
In what analysts saw as a concession to China before the signing, the US Treasury last Monday said China is no longer a currency manipulator.
“Nothing new on disclosure, that’s disappointing,” said Brad Setser, who worked at Treasury during the Obama administration and is now at the Council on Foreign Relations. “The rest is mostly a reiteration of China’s existing IMF and G20 commitments.”
Optimism ahead of the agreement signing and after Treasury’s removal of China from its currency watch list drove the yuan on Tuesday to its strongest level since July. The offshore yuan was little changed after the signing, at 6.88 per dollar.
The Treasury foreign-exchange policy report released last Monday said China “needs to take the necessary steps to avoid a persistently weak currency”.
If issues arise between the two countries and there’s a failure to arrive at a resolution, either may request the IMF to undertake “rigorous surveillance” of the policies agreed to, or initiate formal consultations and provide input, according to Wednesday’s deal.
The onshore yuan is likely to stay just below 7 per dollar after the trade pact, according to Raymond Lee, a money manager at Kapstream Capital in Sydney. “With this deal that’s been done and China telling the US that they’ll watch their currency, I don’t think they’ll allow it to get above 7.25,” he said.