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As the US prepares its annual currency manipulators report, TD Securities takes at a look at who’s doing the dodgy:
Asia’s Currency Manipulators
•The US Treasury Report on trading partners’ FX policies is likely to be released soon, possibly this week. In the period since the timeframe covered in thelastReportwe think USD buying FX intervention has intensified.•We find that almost all Asian countries except Indonesia, Singapore and Philippines breached the first criteria, having a bilateral trade surplus with theUS of $20bn or over. Unsurprisingly China registered the biggest bilateral trade surplus with the US
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•Similarly, almost all countries in the region except China, India and Indonesia registered current account surpluses in excess of 2% of GDP over 2020. Singapore and Taiwan recorded the biggest surpluses at 17.6% and 14.1% of GDP, respectively.
•Most countries also breached the FX intervention criteria and purchased USDs for 6 or more months of 2020. India bought the most USDs according to our calculations. However, as a percentage of GDP Singapore intervened the most.
•We find that Thailand and Taiwan breached all three criteria and are likely to be labelled currency manipulators. According to our calculations China will not be labelled as a currency manipulator.
China’s huge bilateral trade surplus with the US
We find that almost all Asian countries except Indonesia, Singapore and Philippines breached the first criteria,having a bilateral trade surplus with the US of $20bn or over. Unsurprisingly China registered the biggestbilateral trade surplus with the US at around $311bn in the 12m to December 20. While this was lower thanin 2019 when the surplus was $345bn it shows remarkably little progress in reducing China’s trade surpluswith the US despite tariffs and the Phase 1 trade agreement. As we repeatedly highlighted over 2020 Asiantrade was strong, with electronics and medical equipment exports faring particularly well. The fact that so manycountries recorded large bilateral trade surpluses with the US highlights the role that US demand played indriving Asian exports and recovery.
Similarly, almost all countries in the region except China, India and Indonesia registered current accountsurpluses in excess of 2% of GDP over 2020. Singapore and Taiwan recorded the biggest surpluses at 17.6%and 14.1% of GDP, respectively. Indonesia was the only country to register a deficit (-0.4% of GDP). China justavoided breaching this threshold, with a deficit of 1.9% of GDP.
Singapore and Taiwan intervene most as a % of GDP
Most countries also breached the FX intervention criteria and purchased USDs for 6 or more months of 2020.This is not surprising; the USD fell last year and most countries in the region bought USDs to prevent unwantedFX appreciation at a time of economic weakness caused by COVID-19. India bought the most USDs accordingto our calculations, at $129.4bn. However, as a percentage of GDP Singapore intervened the most, to the tuneof 28.3% of GDP according to our calculations. Singapore’s central bank MAS, now discloses its net purchasesof FX and during 2020 they stated that this amounted to $96.5bn. Taiwan also disclosed its FX intervention,stating that its FX intervention amounted to $39.1bn or 5.8% of GDP in 2020. India and Thailand were not farbehind, with their FX interventions each amounting to 5% of GDP according to our calculations.
Thailand and Taiwan likely to be labeled currency manipulators
In the final assessment we find that Thailand and Taiwan breached all three criteria and as such are likely tobe labeled currency manipulators. We note that Taiwan was also labeled a currency manipulator by the USTreasury in Dec 1992. Taiwan’s central bank governor Yang has already indicated that he expects the label to be applied to the country but that he does not expect serious consequences. In particular, he noted that he didnot expect the imposition of “Section 301” measures that may lead to tariffs. We concur.
“Section 301” tariffs were applied to Chinese imports in 2017 but not to Vietnam following the last Report, eventhough technically China did not breach all three criteria while Vietnam did. In the case of Vietnam (as well asSwitzerland) the US Treasury noted they will “press for the adoption of policies that will permit effective balanceof payments adjustments and eliminate the unfair advantage created by Vietnam’s actions”. We think similarlanguage will be applied to Taiwan and Thailand this time, rather than any tariffs.
Notably according to our calculations China will not be labeled a currency manipulator in the upcomingTreasury Report. In fact, if anything China was a marginal net seller of USDs over 2020, the only country in theregion to have done so. Additionally, China’s current account surplus was slightly less than the 2% thresholdeven as the country registered a massive bilateral trade surplus with the US. Reports overnight suggest thatTreasury Secretary Yellen will decline to name China as a currency manipulator in this Report, an outcome ouranalysis supports.
Overall, our findings show that Asian central banks were significant USD buyers last year. Massive interventionled to a huge increase in FX reserves; EM Asia FX reserves rose by $518bn. While we estimate that a largepart of this was due to valuation changes ($169.5bn) the bulk, around $348bn was in large part likely due toFX intervention. The broad recovery in the USD so far in 2021 suggests that this has not been repeated overrecent months. Indeed, data for Q1 2021 corroborates this. However, this will not change the fact that theupcoming Treasury Report will make uncomfortable reading for many countries in Asia.