WASHINGTON — U.S. Treasury Secretary Jacob Lew plans to press China on moving toward a more market-based exchange rate at a high-level dialogue in Beijing next week that comes at a time when China’s currency has hit a five-year low.
A senior Treasury official who briefed reporters on the condition of anonymity on Wednesday said U.S. officials have been “encouraging and pressing Chinese authorities to move forward with an orderly transition to a more market-based exchange rate” and will continue to do so next week. Lew will be in Beijing from Sunday to Tuesday for the U.S.-China Strategic and Economic Dialogue.
China’s central bank earlier this week fixed the daily reference rate of the yuan at 6.5784 — the lowest daily rate against the dollar in five years. China’s exchange rate has fluctuated significantly in the past year, causing uncertainty in global markets.
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The recent fluctuation in the fixed daily rate reference was seen as a response to Federal Reserve chairwoman Janet Yellen’s recent signal that the bank could be moving toward increasing the U.S. interest rate in the coming months.
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Asked to respond to reports suggesting that China may not be committed to moving toward a more market-based exchange rate, the Treasury official said, “For China, the hallmark of [a market-based exchange rate] regime will be two-sided flexibility. What I mean by that is that when pressure from capital flows are on the downside, there is exchange rate depreciation, but when economic conditions manifest through global growth conditions or capital flows, there is upward pressure on the exchange rate and in those scenarios the exchange rate appreciates.
“My sense is that this has been for some time the broad trajectory of China’s exchange rate policy, but it is essential that they continue to move in this direction of two-sided flexibility,” he added.
The Treasury Department declined to name China a currency manipulator in its semiannual report to Congress at the end of April, but it did place the country along with South Korea, Japan, Taiwan and Germany on a monitoring list and said it will “closely monitor and assess the economic trends and foreign exchange rates of these economies.” It declined to elevate the five for intensified and enhanced monitoring because none of them met all three criteria.
A new feature of Treasury’s report on the foreign exchange rate polices of America’s major trading partners was the establishment of an exchange rate monitoring process. The five did not meet all three criteria needed to be subjected to enhanced monitoring for using exchange rate polices to gain an unfair competitive trade advantage, but they came close, meeting two out of the three criteria, Treasury said.
If a country does meet all three criteria and is subjected to the enhanced monitoring, the U.S. is required to engage in consultations. If the country in question fails to take appropriate action after one year to “correct its undervaluation and external surpluses,” the president can take several punitive steps, including denying access to OPIC funding, excluding the country from U.S. government procurement, calling for more scrutiny from the International Monetary Fund and instructing the U.S. Trade Representative’s office to take into account insufficient action in determining whether a country is eligible to enter into trade negotiations with the U.S.
The Treasury official, asked about the yuan hitting a five-year low this week, said the U.S. measures China’s currency against a full basket of trading partners.
“As a broad matter, it is very important that China continue to make progress,” he said. “I think we’ve seen some progress, but they need to continue to make progress in clearly communicating to the market and to the rest of the world what it intends to do about exchange rate regimes and what its exchange rate policies are. That communication is a core part of an effective exchange rate regime.”
He said Lew and officials plan to engage China on a number of key issues next week, including supporting domestic demand and household income, improving transparency on economic data, especially in the services sector, and in the formulation of regulations and opening markets by liberalizing China’s investment rules through the ongoing negotiations between the U.S. and China on a bilateral investment treaty.