Brad Setser

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Cross border flows, with a bit of macroeconomics

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When Did China “Manipulate” Its Currency?

by Brad Setser

There is no single definition of manipulation, to be sure—so no way of definitively answering the question. Over the last ten or so years, manipulation has been equated with “buying foreign exchange in the market to block appreciation.” That definition is certainly built into the criteria laid out in the 2015 Trade Enforcement Act. But “buying reserves to block appreciation” wasn’t hardwired into the 1988 act, which has a much more elastic definition of manipulation.

Yet even if the 2015 Trade Enforcement Act isn’t the only possible definition of manipulation, it still provides a bit of guidance – as President Trump implicitly recognized today: “Mr. Trump said the reason he has changed his mind on one of his signature campaign promises is that China hasn’t been manipulating its currency for months.”

The thresholds of being called out for “enhanced analysis” that the Treasury was required to set out in the 2015 act aren’t perfect—no measures are. The threshold for the bilateral trade balance is genuinely problematic. It lets small countries with a propensity to intervene in the foreign exchange market off the hook for one. And even if you think there is sometimes valuable information in the bilateral trade data (many don’t), the bilateral balance really should be assessed on a value-added basis.*

But the current 3 percent of GDP current account surplus and 2 percent of GDP in intervention thresholds are certainly reasonable. Those criteria show that China should have been singled out for “enhanced engagement” from 2005 to roughly 2012, but not since.

But all criteria can be gamed. And I worry a bit that China has been revising its current account data with the goal of keeping the headline external surplus down—it is hard to overstate the number of times the details of China’s services data have been revised since 2014.***

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Does Currency Pressure Work? The Case of Taiwan

by Brad Setser

I confess that I probably am the only person in the world who—setting aside the internal politics of the Trump White House—would be excited to write the Treasury’s foreign currency report this quarter.

Not because of China.

I would say China met the existing 2015 manipulation criteria in the past. I would put the criteria under review (I personally think the bilateral surplus analysis should be complemented with value-added measures,* which would reallocate some of China’s surplus to Japan, Korea, Taiwan, and others).**

But not name China. Not now. As the Financial Times notes: “It is in no one’s interest, including the US, if Beijing suddenly stops intervening to defend the renminbi and a destabilising rush of capital flight and sharp devaluation follows.”

The U.S. would be completely isolated in naming China, the impact of China’s 2016 stimulus seems to have been bigger than the impact of the renminbi’s depreciation (China’s external surplus is falling) and there is plenty of scope to push China on other trade issues.

But the report could still be interesting, as there is a good case that the United States should find ways to keep the heat on Korea and Taiwan up — even if neither likely meets all three of the criteria in the 2015 Trade Enforcement Act, and even if geopolitics probably is a constraint on getting too tough on Korea right now.

It is often argued that countries won’t change their currency policies with a gun pointed to their heads, so explicit threats won’t work. Fair enough: threats do not always work (see the Freedom Caucus, health care).

On the other hand, sometimes countries get a bit locked into a certain set of export-promoting policies, and won’t change unless their feet are held to the proverbial fire.

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Does Korea Operate A De Facto Target Zone?

by Brad Setser

Fred Bergsten of the Peterson Institute has long argued for target zones around the major exchange rates. In the past twenty years, no G-3 economy has followed Bergsten’s policy advice.* The world’s biggest advanced economies have wanted to maintain monetary policy independence, and—Japan perhaps excepted, at least during certain periods—they haven’t viewed foreign exchange intervention as an independent policy tool.

China formally has a band around its daily fix, but its exchange rate is still more of a peg (now a basket peg, without any obvious directional crawl over the last 7 months) than anything else.

I though increasingly think that Korea’s exchange rate management could be described as a target zone of sorts.

It buys dollars and sells won when it thinks the won is too strong (recently, too strong has been less than 1100 won per dollar). And it sells dollars and buys won when it thinks the won is too weak (recently too weak has been above 1200 won per dollar).

As a result, Korea intervened heavily to cap won strength in q3 2016. Counting the change in its forward position, government deposits, and government purchases of foreign debt securities, its total foreign exchange purchases in q3 were roughly $12 billion (about 3.5 percent of GDP).**

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The Price of U.S. Imports From China Keeps Falling

by Brad Setser

The way trade is to be taxed at the border may—or may not—be about to change radically. But rather than speculate on the nature of the new world, I wanted to highlight one feature of the old.

I sometimes hear that China is loosing trade competitiveness because of rising domestic costs. And thus Chinese manufacturing firms need to move out of their ancestral homeland, either to low cost manufacturers like Vietnam or even to advanced economies like the U.S., in order to remain competitive.

I do not see it in the data. At least not in aggregate — the stories of individual sectors of course could differ. .

If the price of imports from China (as reported by the U.S. Department of Labor) is compared to the price of U.S. made finished goods and the price of domestic manufactures, Chinese goods not only look very competitive, but broadly speaking have been gaining in price competitiveness against U.S. made goods ever since the yuan stopped appreciating—and with the yuan depreciation of the past year, are poised to become even more competitive.


China maybe has lost a little of its previous edge over Canada and Europe thanks to the depreciation of the Canadian dollar and the euro over the past couple of years. But broadly speaking, the price of goods imported from China is back to where it was in 2004 (when the data series starts) while price of manufactured goods from the United States wealthier trading partners has gone up since then.

There is one potentially significant problem with the U.S. data here. About a quarter of U.S. imports from China are computers and cell phones. And getting the right “price” for goods marked by rapid technological change over time is hard. I suspect that the gap over time between the evolution of Chinese prices and U.S. finished goods prices would be smaller if computers and consumer electronics were removed. In fact, I would be thrilled if the BLS put out such a series. The area of real overlap between the U.S. and China increasingly is in the production of machined parts and capital goods (suggestions for how best to capture this most welcome, the right measure of U.S. prices might not be final goods excluding food and energy).

Setting that caveat aside though, I do not doubt that the basic story in the U.S. import price data is true: Over the past couple of years, the combination of U.S. workers and U.S. industrial robots has been loosing price competitiveness to the combination of Chinese workers and Chinese industrial robots.

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Appreciate the Disaggregated Dollar

by Brad Setser

The broad dollar is now up well over 20 percent since the end of 2012. The vast bulk of the move occurred in the last two and a half years.

The dollar has essentially reversed its 2006 to 2013 period of sustained dollar weakness (tied to the weakness of the U.S. economy, the size of the U.S. trade deficit, and the Fed’s willingness to act to ease U.S. monetary conditions at a time when the ECB was stubbornly resistant to monetary easing).

And in some sense we have already seen some of the results play out.

  • U.S. export growth has slowed (though U.S. import growth has remained fairly subdued, particularly in 2016—moderating the impact of net trade on output)
  • China decided that it couldn’t continue to manage its currency primarily against the dollar, but only after (essentially) following the dollar up in 2014. The transition though to a basket peg—if that is what managing with reference to a basket means—hasn’t been clean. After the 2014 appreciation, it seems China wanted to use the transition to a new regime to bring the yuan down a bit against the basket. One big question is whether China thinks the 10 percent depreciation against the basket that it carried out over the past year and a half is enough.
  • Many, but not all, oil exporters that maintained heavily managed currencies against the dollar let their currencies depreciate. Saudi Arabia is of course the most important exception.
  • And—illustrating the impact of the reserves that were accumulated by most emerging economies over the last decade plus—the big dollar appreciation has yet to trigger a major emerging market default. Brazil and Russia have both weathered large depreciations and recessions without default.

One particularity of the United States is that two of its closest trading partners—Canada and Mexico—are both major oil producers and large exporters of manufactures. The value of both the Mexican peso and the Canadian dollar both really matter for U.S. trade, and both are to a degree influenced by the price of oil. The following graph, prepared by Cole Frank of the Council on Foreign Relations, disaggregates the contribution of different currencies to the move in the trade-weighted (nominal) dollar.


The G3 currencies (dollar, euro, and yen) naturally tend to attract a lot of attention. Especially with the euro approaching parity against the dollar. But, I at least, find it useful to remind myself how much Mexico, Canada, and China matter for the broad dollar index (and thus U.S. trade).

Given that China and emerging Asian currencies that tend to ultimately move in a somewhat correlated way with China are about 30 percent of the trade-weighted dollar index, it seems obvious that the U.S. would face a significant real shock if the move in China’s currency ends up matching the moves in some other key currencies over the last four years.

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Korea’s September Intervention Numbers

by Brad Setser

Korea’s balance of payments data—and the central bank’s forward book—are now out for September. They confirm that the central bank intervened modestly in September, buying about $2 billion.* That is substantially less than in August. Based on the balance of payments data, intervention in q3 was likely over $10 billion (counting forwards).

Korea is widely thought to have intervened when the won got a bit stronger than 1100 at various points in the third quarter (a numerical fall is a stronger won).


I suspect that had an impact when the market wanted to drive the won higher. And, well, market conditions have changed since then. The dollar appreciated against many currencies in October, and Korea’s own politics have weighed on the won. Korea’s headline reserves fell in October, but that was likely a function of valuation changes that reduced the dollar value of Korea’s existing holdings of euro, yen, and the like, not a shift toward outright sales.

There though is a bit of positive news out of Korea. The new finance minister, at least rhetorically, seems keen on new fiscal stimulus. The Korea Times reports the nominee for Finance Minister supports additional stimulus:

“I [Yim Jong-yong] believe there is a need (for a further fiscal stimulus) as the economy has been in a slump for a long time amid growing external uncertainties.”

Korea has the fiscal space; it should use it!

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Won Appreciates, South Korea Intervenes

by Brad Setser

South Korea’s tendency to intervene to limit the won’s appreciation is well known.

When the won appreciated toward 1100 (won to the dollar) last week, it wasn’t that hard to predict that reports of Korean intervention would soon follow.

Last Thursday Reuters wrote:

“The South Korean currency, emerging Asia’s best performer this year, pared some gains as foreign exchange authorities were suspected of intervening to stem further appreciation, traders said. The authorities were spotted around 1,101, they added. ”

The won did appreciate to 1095 or so Tuesday, when the Mexican peso rallied, and has subsequently hovered around that level. It is now firmly in the range that generated intervention in August.


The South Koreans are the current masters of competitive non-appreciation. I suspect the credibility of Korea’s intervention threat helps limit the scale of their actual intervention.

And with South Korea’s government pension fund now building up foreign assets at a rapid clip, the amount that the central bank needs to actually buy in the market has been structurally reduced. Especially if the National Pension Service plays with its foreign currency hedge ratio to help the Bank of Korea out a bit (See this Bloomberg article; a “lower hedge ratio will boost demand for the dollar in the spot market” per Jeon Seung Ji of Samsung Futures).

Foreign exchange intervention to limit appreciation isn’t as prevalent it once was. More big central banks are selling than are buying. But it also hasn’t entirely gone away.

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The Most Interesting FX Story in Asia is Now Korea, Not China

by Brad Setser

China released its end-August reserves, and there isn’t all that much to see. Valuation changes from currency moves do not seem to have been a big factor in August, the headline fall of around $15 billion is a reasnable estimate of the real fall. The best intervention measures — fx settlement, the PBOC balance sheet data — aren’t out for August. Those indicators suggest modest sales in July, and the change in headline reserves points to similar sales in August.

That should be expected. China’s currency depreciated a bit against the dollar late in August. In my view, the market for the renminbi is still fundamentally a bet on where China’s policy makers want the renminbi to go, so any depreciation (still) tends to generate outflows and the need to intervene to keep the pace of depreciation measured.* Foreign exchange sales are thus correlated with depreciation.

But the scale of the reserve fall right now doesn’t suggest any pressure that China cannot manage.

That is one reason why the market has remained calm.

Indeed the picture in the rest of Asia could not be more different than last August, or in January.

The won for example sold off last August and last January. More than (even) Korea wanted. During the periods of most intense stress on China, the Koreans sold reserves to keep the won from weakening further.

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The 2016 Yuan Depreciation

by Brad Setser

The Bank for International Settlements’ (BIS) broad effective index is the gold standard for assessing exchange rates. And the BIS shows—building on a point that George Magnus has made—that China’s currency, measured against a basket of its trading partners, has depreciated significantly since last summer. And since the start of the year. On the BIS index, the yuan is now down around 7 percent YTD.

Those who were convinced that the broad yuan was significantly overvalued last summer liked to note how much China’s currency had appreciated since 2005.

But 2005 was the yuan’s long-term low. And the size of China’s current account surplus in 2006 and 2007 suggests that the yuan was significantly undervalued in 2005 (remember, currencies have an impact with a lag).

I prefer to go back to around 2000. The yuan is now up about 20 percent since then (since the of end of 2001 or early 2002 to be more precise).

And twenty percent over 15 years isn’t all that much, really.

Remember that over this time period China has seen enormous increases in productivity (WTO accession and all). China exported just over $200 billion in manufactures in 2000. By 2015, that was over $2 trillion. Its manufacturing surplus has gone from around $50 billion to around $900 billion. China’s global trade footprint has changed dramatically since 2000, and a country should appreciate in real terms during its “catch-up” phase.

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Is The Dirty Little Secret of FX Intervention That It Works?

by Brad Setser

Foreign exchange intervention has long been one of those things that works better in practice than in theory.*

Emerging markets worried about currency appreciation certainly seem to believe it works, even if the IMF doesn’t.**

Korea a few weeks back, for example.

Korea reportedly intervened—in scale and fairly visibly—when the won reached 1090 against the dollar in mid-August:

“Traders said South Korean foreign exchange authorities were spotted weakening the won “aggressively,” causing them to rush to unwind bets on further appreciation. On Wednesday (August 10), according to the traders, authorities intervened and spent an estimated $2 billion when the won hit a near 15-month high of 1,091.8.”


And, guess what, the won subsequently has remained weaker than 1090, in part because of expectations that the government will intervene again. And of course the Fed.

And that is how I suspect intervention can have an impact in practice. Intervention sets a cap on how much a currency is likely to appreciate. At certain levels, the government will resist appreciation, strongly—while happily staying out of the market if the currency depreciates. That changes the payoff in the market from bets on the currency. At the level of expected intervention; appreciation becomes less likely, and depreciation more likely.***

1090 won-to-the-dollar incidentally is still a pretty weak level for the won, even if the Koreans do not think so. The won rose to around 900 before the crisis, and back in 2014, it got to 1050 and then 1000 before hitting a block in the market. In the first seven months of 2016, the won’s value, in real terms, against a broad basket of currencies was about 15 percent lower than it was on average from 2005 to 2007.

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