China has finally taken off the label of a "currency manipulator"

China has finally taken off the label of a "currency manipulator" [Duowei Finance] According to the 1988 U.S. Trade and Competition Act (Trade and Co…

[Duowei Finance] According to the provisions of the U.S. Trade and Competitiveness Act of 1988, the U.S. Treasury Department is required to submit reports to Congress every six months on the exchange rate policies of its major trading partners. The U.S. Treasury Department noted in a 28-page report submitted on Friday that during the period covered by the report, all major trading partners did not meet the standards for currency manipulation under the Trade and Competition Act. For the first time, China is no longer considered a currency manipulator.

The U.S. China Business Council issued a statement at around 3 p.m. that day, which probably meant "I told you so."

"Regarding China's foreign exchange policy, the Treasury Department made the correct statement in its report to Congress." said John Frisbie, chairman of the U.S.-China Business Council. The committee represents U.S. multinational companies operating in China. "Labeling China as a currency manipulator will not help achieve the goal of fully convertible RMB and a market-determined exchange rate. Moreover, the label of 'manipulator' may prompt negative reactions from China and delay progress on this issue."

For many years, the committee has worked hard to prove to the U.S. Congress and the public that the low RMB exchange rate is not the only reason for the loss of U.S. manufacturing jobs and the record-breaking trade deficit with China. In fact, the appreciation of the RMB exchange rate against the US dollar is in line with market expectations, with an annual appreciation of about 5%. This has led to rising labor costs in China. Despite this, "Made in China" exports to the United States continue to hit new highs. Foreign trade data from the U.S. Census Bureau shows that the U.S. trade deficit with China continues to rise.

The long-standing position of the U.S.-China Business Council is that China should speed up the implementation of financial industry reforms, abolish capital controls, and let the market determine its exchange rate entirely. The committee said in a statement that it supports the Obama administration's cooperation with China on the implementation of exchange rate reforms. The committee opposed certain counterproductive legislative proposals in Congress that would impose punitive tariffs based largely on assumptions about the “true” exchange rate. Some congressional leaders tried unsuccessfully to push such proposals last year.

The U.S. Treasury Department stated that there is still room for further appreciation of the yuan. The following is excerpted from the report submitted to Congress by the U.S. Department of the Treasury:

On April 14, the People's Bank of China announced that it would expand the daily fluctuation limit of the RMB against the U.S. dollar in the mainland foreign exchange market from five thousandths of the day's central parity rate to one percent. This volatility limit applies to the daily trend of RMB against the US dollar. When announcing the decision, the People's Bank of China stated that the move "is to comply with the requirements of market development, promote price discovery of the RMB exchange rate, enhance the two-way floating flexibility of the RMB exchange rate, and improve the construction of a managed floating exchange rate system that is based on market supply and demand and adjusted with reference to a basket of currencies." If the measures to expand trading volatility can make the RMB exchange rate better reflect market forces, it will help adjust and rebalance the RMB exchange rate, which will be beneficial to both China and the United States and the world economy.

During the 2008 financial crisis, the RMB exchange rate stabilized for a time. In June 2010, the original exchange rate policy pegged to the U.S. dollar was cancelled. Since then, the yuan has appreciated by 8%. Since China's inflation level is higher than that of the United States, the RMB exchange rate against the US dollar has actually appreciated by 12.5% ​​after inflation adjustment since June 2010, and has appreciated by about 40% since China launched exchange rate reform in 2005.

As of May 15, the exchange rate of RMB against the US dollar has been basically flat this year, with an actual appreciation of 0.36%.

Some people may still call China a currency manipulator. China's way of managing the yuan is to absorb large amounts of U.S. dollars to prevent them from circulating in the market. The greater the demand for converting U.S. dollars into RMB, the stronger the RMB will be.

But if the People's Bank of China keeps all those U.S. dollars out of the market and holds them in the form of cash reserves, then it will actually make these U.S. dollars exist in the form of U.S. Treasury bonds and will not be converted into RMB.

China's foreign exchange reserves increased again by US$74.8 billion in the first three months of this year. According to the U.S. Treasury Department, as of the end of March 2012, the People's Bank of China held US$3.3 trillion in foreign exchange reserves, equivalent to 45% of China's GDP in 2011. The average Chinese citizen is about US$2,450, which is nearly twice India's per capita GDP.

In U.S. dollar terms, China's foreign exchange reserves are nearly three times those of Japan, the second-largest country with foreign exchange reserves ($1.21 trillion, accounting for 21% of its GDP). If compared with larger groups, according to the International Monetary Fund (IMF) report, China's foreign exchange reserves are almost equivalent to the sum of the foreign exchange reserves held by all developed economies, accounting for nearly half of the foreign exchange reserves held by emerging and developing countries.

However, anyone doing business in China knows that the Chinese government will not move too fast. In fact, the yuan appreciates every year. China is undergoing slow but solid structural reforms and is no longer satisfied with being a global manufacturing center. But that won't happen anytime soon because China doesn't want to see unemployment soar as factories relocate to cheaper countries.

Since 2005, the RMB's real effective exchange rate (REER, which measures the overall cost competitiveness of a country's currency relative to its trading partners) has climbed steadily. From July 2005 to April 2012, the real effective exchange rate of the RMB appreciated by 27.4%. In the last few months of 2011, the real effective exchange rate of the RMB appreciated particularly rapidly, resulting in an appreciation rate of 6.2% for the whole of 2011. In the first four months of 2012, the real effective exchange rate of the RMB has appreciated by 0.5%.

For the U.S. Treasury Department, at least the data is moving in the right direction.