US Likely to Designate China as a Currency Manipulator

The United States is expected to designate China as a currency manipulator in October. The designation would increase the value of the yuan, which in turn would cause the Korean won to appreciate, dealing a blow to the South Korean economy heavily reliant on exports.

The United States Department of the Treasury releases a foreign exchange report in every April and October. Currency manipulator designation depends on whether a country’s trade surplus with the U.S. exceeds US$20 billion, whether its current account surplus exceeds 3% of its GDP, and whether its annual net dollar purchase exceeds 2% of its GDP. Any country satisfying two out of the three is put on the department’s monitoring list and any country satisfying all is subject to enhanced analysis, which has the same meaning as the designation.

In the latest report, China satisfied only one of those. However, the yuan showed a depreciation of approximately 5% during the past two months amid the ongoing trade war between the U.S. and China, which means the designation is becoming more and more likely.

Once the designation occurs, China and the U.S. have bilateral negotiations for one year in accordance with the Trade Facilitation and Trade Enforcement Act of 2015. If nothing is corrected in spite of the talks, financial assistance for American companies investing in China is stopped and Chinese companies are blocked from participating in American procurement markets. In addition, the U.S. government can ask the IMF to strengthen its monitoring on China. The Chinese economy is likely to take a hit and the yuan is likely to be appreciated during the period.

The South Korean economy is predicted to be negatively affected in that case. This is because the South Korean economy is heavily reliant on exports to China, and the yuan and the won are forecast to move in sync with each other. Won appreciation is likely to result in a lower level of price competitiveness on South Korean exporters’ part and they are likely to be exposed to foreign exchange losses as a result of an increase in foreign exchange volatility.