Mnuchin Open to Change in Currency Test as U.S. Spars With China

Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give President Donald Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies.

One method Mnuchin’s considering: Use a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law, he said. The other would be to change the criteria that help establish whether a country is engaging in competitive devaluation of its currency, according to Mnuchin.

Treasury applies three tests to measure whether a country should be labeled a currency manipulator. The framework of the criteria is provided by Congress, but the specific thresholds in the tests are at Treasury’s discretion.

“We may at some point look at whether the tests should be changed,” Mnuchin said Sunday in an interview in Jerusalem, the first stop of a six-country tour of the Middle East this week. “We always look at these things.”

Critical Report
While Mnuchin refrained from labeling China a currency manipulator in a semi-annual report released last week, averting an escalation of the trade war, the report was critical of China, highlighting U.S. concerns about the country’s bilateral trade surplus. The 34-page report also said the U.S. was “deeply disappointed” that China doesn’t disclose its currency interventions.

“It was stronger in the language, and that was intended,” Mnuchin said.

One issue last week’s report didn’t address is the strengthening dollar’s role in contributing to the U.S. current-account deficit. A strong U.S. economy is driving the Federal Reserve to raise interest rates, a tightening campaign that has pushed up the dollar and weighed down emerging-market currencies. The Bloomberg Dollar Spot Index has climbed 6.7 percent since mid-April amid rate increases and strong growth, spurred in part by expansive fiscal policy.

Mnuchin on Sunday acknowledged that “there are obviously economic issues” behind the renminbi’s weakness. The yuan has dropped about 10 percent against the dollar in the past six months as China’s economic growth slows, a move Mnuchin raised in a meeting with People’s Bank of China Governor Yi Gang in Bali, Indonesia earlier this month.

“The governor did make clear to me in our meetings that it was not their objective to see their currency depreciate more,” Mnuchin said.

Three Test

As a candidate, Trump vowed to label China a currency manipulator on “Day One” of his administration, which he has yet to do officially. While Mnuchin’s semi-annual reports have consistently found China to warrant close monitoring but not a formal designation as a currency manipulator, Trump has tweeted to the contrary as recently as July. The U.S. hasn’t labeled any nation a currency manipulator since 1994, a move that in any case does not trigger immediate sanctions.

Congress’s criteria to assess if a country is interfering in its currency are: A minimum $20 billion trade surplus with the U.S., a current account surplus in excess of 3 percent of gross domestic product, and repeated intervention in currency markets.

Sensing anticipation around the October report — driven by Trump’s comments throughout the summer that China was a currency manipulator — Mnuchin said he sought to provide ample information in the document on the two trade acts that define the reporting standards and on how Treasury views the Chinese economy.

“The report is not meant to be a political report. The report is intended for us to report to Congress on information, and I think we were — at my direction — we put a lot more information in this report, which we will continue to do on an on-going basis,” Mnuchin said.