Taiwan, Thailand and Vietnam All Risk ‘Currency Manipulator’ Label

The forthcoming US Treasury FX manipulation report will probably add several Asian countries to its watchlist. It may even go so far as to label some of them ‘currency manipulators’. Vietnam, Taiwan and Thailand are the three Asian countries at risk (and in Europe, Switzerland) which could prompt some increased disclosure, at least qualitatively, over currency intervention. It is unlikely, however, to alter efforts to lean against future currency appreciation in any of the three countries.

Treasury criteria, both economic and political

The US Treasury could release their delayed semi-annual FX manipulation report in the coming weeks. January’s report, delayed from the usual October release, was significant because it dropped the currency manipulator designation for China imposed in August 2019. Given the report came just ahead of the signing of the Phase 1 trade deal (and the renminbi was trading at its strongest level in around 5 months), the political element was very evident. Moreover, the currency manipulator label was announced in August 2019 despite China meeting only one of the three criteria in the May 2019 report.

No major trading partner met the three US Treasury criteria in January. And apart from China’s designation last year, no country has been given the label since China previously in 1994. Ten countries met two criteria and were therefore included on the monitoring list, namely China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia, Vietnam and Switzerland. The US Treasury criteria are as follows:

Countries reviewed must have bilateral goods trade with the US (exports + imports) of at least $40bn annually, then:

1. A bilateral trade surplus with the US of at least $20bn over a 12-month period;
2. A C/A of at least 2% of GDP over a 12-month period;
3. Persistent and one-sided intervention totalling at least 2% of GDP covering at least 6 of the 12 months.

As the January report covered the 12 months through June 2019, we expect the forthcoming report to cover the calendar year 2019. We present the data for the criteria using 2019 data in Table 1 and highlight the cells in orange where a country meets the threshold. We include all 10 countries listed in the January report and four we think could be added. The last report mentions both Taiwan and Thailand as ‘close to triggering key thresholds’, and the US Treasury were also already tracking them ‘carefully’. We include India due to recent currency intervention and a shifting C/A position (India was removed from the monitoring list in May last year), and Hong Kong for political reasons (but note it does not meet the initial $40bn total trade criteria).

Taiwan, Thailand and Vietnam meet all three US Treasury criteria

Taiwan, Thailand and Vietnam meet all three thresholds used to identify ‘potentially unfair currency practices or excess external imbalances’. The US runs a sizeable trade deficit with each country, current accounts are well over 2% of GDP, and FX reserve accumulation has been substantial. But this third criterion on intervention is not a straightforward metric. One reason is that none of these three countries fully disclose FX intervention (and headline FX reserves are impacted by valuation changes). Another is that our FX intervention metric (1-year change in FX reserves as a share of GDP) does not capture whether the intervention has been persistent and one-sided over at least a six-month period. This leaves the Treasury sufficient wiggle room to deem whether the criterion is met and the manipulator label applied.

Table 1: Taiwan, Thailand, Vietnam and Switzerland meet all three US Treasury Criteria

Source: Bloomberg, US Census Bureau, IMF, Macro Hive

Taiwan: Last year’s bilateral trade surplus with the US was only just above the threshold at $23bn, but the country’s C/A surplus is among the largest globally at 10.6% of GDP. The decision over FX intervention will most likely be a political one. Taiwan’s central bank has recently started to disclose intervention data and reported net purchases last year at $5.5bn, or just 0.9% of GDP (and zero for 2018). But ongoing and regular intervention to lean against TWD appreciation plus the CBC’s use of FX swaps leaves concerns over undisclosed intervention via the swap market. Brad Setser’s estimate of a huge $130-$200bn in undisclosed FX intervention over the past six years brought these concerns to light.

An additional consideration for Taiwan is the recent announcement of a $12bn TSMC factory to be located in Arizona. Any US decision to label Taiwan a currency manipulator could well jeopardize the project, which is expected to start construction next year and begin production in 2024. Given this, we expect the forthcoming report will add Taiwan back onto the monitoring list but not go any further than that (Taiwan was on the monitoring list during 2016-2017 and removed in the October 2017 report).

Thailand: Similar to Taiwan, Thailand only just meets the criteria on the bilateral trade surplus with the US, while the C/A surplus is substantially above the 2% threshold. Our estimate on intervention is higher than for Taiwan at 3.3% of GDP. But there are two important differences. The first is that the earlier appreciation trend, and BoT efforts to lean against it, is no longer in play (Chart 1). Recent political upheaval and the hit from COVID-19 to the tourism-dependent economy leaves the Thai baht as Asia’s worst-performing currency YTD. A second difference is that the monitoring list has never previously included Thailand. Inclusion on the monitoring list, on the basis of meeting two out of the three criteria, could therefore prompt some concerns at the BoT over future intervention. But as the currency dynamics have shifted away from the earlier appreciation, this will have no immediate market impact.

Chart 1: CBC and BoT intervened to stem FX appreciation in 2019, SBV to maintain stability

Vietnam: Despite Vietnam’s small size (2019 GDP at $260bn), it now runs the fourth-largest trade surplus with the US, and the second largest in Asia. The surplus has increased sharply in recent years (Chart 2) due to two factors. One is production shifts out of China during the earlier stages of the US-China trade war. And the second is the country’s export-dependent growth model pursued since it joined the WTO in 2007. Vietnam has risked the ire of the US for some time, and last year President Trump accused Vietnam of treating it ‘even worse than China’ and imposed tariffs on its steel imports. And, the US Treasury’s monitoring list has included Vietnam since May 2019.

The January FX report noted that Vietnam had ‘reasonable rationale for rebuilding reserves’ and that intervention occurs in both directions. We expect this stance will be broadly repeated for now and that the Treasury will deem Vietnam, like Taiwan and Thailand, to meet only two of the three criteria.

Chart 2: The US trade deficit with Vietnam has widened substantially in recent years

Market implications likely to be minimal

What does it mean when the US Treasury imposes the label of currency manipulator or adds a country to the monitoring list? In practice, very little. When Secretary Mnuchin announced that China had been determined a currency manipulator, the press release noted he would ‘engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions’. But while the IMF provides estimates of fair value for individual currencies, and on a REER basis not versus the USD, it is difficult to see what additional role the IMF would play in any future discussions over China’s exchange rate policy. And for countries added to the monitoring list, bilateral discussions and some increased scrutiny over currency intervention is as bad as it gets.

South Korea, Malaysia and Singapore meet two of the three criteria

Our estimate of the updated Treasury table shows South Korea and Malaysia meeting two of the three criteria and remaining on the monitoring list. Neither country meet the intervention criteria, and we do not think they are close. BoK now discloses some limited information on FX intervention and said that net intervention was $3.8bn during the first half of last year, $2.87bn in Q3, and zero in Q4. The $6.67bn total is just 0.4% of GDP and close to our 0.3% estimate using simple reserve accumulation. For Malaysia, intervention also looks to be small at 0.5% of GDP.

Singapore is unusual within the list of countries currently on the monitoring list for being the only country running a trade deficit with the US. It’s huge C/A surplus at 17% of GDP and 8% of GDP in FX intervention through the second half of last year nevertheless leave it with the largest values for these criteria. MAS’s recent efforts to improve disclosure around FX intervention (with the decision to bring forward the date to comment intervention statistics to April 2020 from the earlier plan of July) will no doubt appease the US Treasury. And, as the intervention is the result of an exchange-rate policy which targets a trade-weighted basket, we expect the next report will simply maintain the line that Singapore should use structural reforms to reduce its very high savings rate.

Could China’s currency manipulation status be reintroduced?

Given the heightened US-China tensions (see our recent US-China tension tracker), there is a non-negligible chance that China gets relabelled as a currency manipulator. China meets only one of the three criteria, but that did not prevent the August 2019 announcement. And while the US deficit with China has narrowed, it still accounts for 38% of the total trade deficit (versus 45% through June 2019). Another factor is that the renminbi is now back above 7/USD, the threshold that triggered last year’s manipulator designation.

But we are not convinced that Trump wants to bring the currency back in to his US-China rhetoric right now. In sharp contrast to last summer, he has been very quiet on the currency issue and the trade-weighted dollar is currently around its weakest level in two years. Another factor is that the Phase 1 trade deal is now in place, albeit with China’s purchases of US goods running well below agreed commitments. Reintroducing the label would trigger fears that the deal gets abandoned and could mean a much more significant market impact.

Will Hong Kong be added despite bilateral trade <$40bn?

Hong Kong does not have bilateral goods trade with the US in excess of $40bn, and it runs a trade deficit with the US. It does, however, have a large C/A surplus and significant FX intervention due to the decades-old HKD peg. But the US may opt to send a political message. Similar to the recent US decision to revoke Hong Kong’s special customs status, any move to add Hong Kong to the US Treasury monitoring list would be largely symbolic and signal more that the US will now treat Hong Kong the same as China by monitoring the HKD peg.

Caroline Grady is a Senior Researcher at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)