US Treasury Oct 2013 Report on International Economic and Exchange Rate Policies Summary

This summary only covers the section Key Findings of  "Report to Congress on International Economic and Exchange Rate Policies" of US Treasury, Oct 31, 2013. You can find the pdf file of the report here.

Key Findings

US Economy

 - US real GDP grew 1.8 percent (annual rate) during the first half of 2013
 - Consensus of private forecasters: 2.8 percent growth in 2014 expected
 - Growth supported by consumer spending and residential investment
     (due to improved household balance sheets, accommodative credit conditions, and faster job creation)
 - Unemployment: dropped to 7.2% as of Sep 2013, the lowest level since Nov 2008
 - Federal deficit: 7% -> 4% of GDP, the lowest level since FY2008, acting as a headwind to growth
 - The Administration remains committed to further reducing the deficit consistent with economic conditions

Global Economy

 - IMF projects: Growth of 2.9% in 2013 (down from 3.2% in 2012), 3.6% in 2014
 - Europe: Signs of the lengthy recession in the euro area has come to an end, albeit high unemployment rates
 - Emerging Market Growth: Slowed due to
    1) waning of post-crisis stimulus, 2) slowing global export demand, and 3) tighter credit conditions
 - Emerging Market Currencies: Many of them depreciated in 2013. After an initial market sell-off in May, began to differentiate among emerging market countries according to
    1) strength of their policy frameworks, and 2) their current account positions
 - Many emerging markets have strengthened their economic institutions and policy frameworks over the past decade and thus increased their resilience to shifts in capital flows.

Euro area

 - Countries with large and persistent surpluses need to take action to
    1) boost domestic demand growth, and 2) shrink their surpluses
 - Germany maintained a large current account surplus throughout the euro area financial crisis
 - In 2012, Germany's nominal current account surplus was larger than that of China
 - Germany's slow growth of domestic demand and dependence on exports have hampered global rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment.
 - The net result: deflationary bias for the euro area.

Asia

 - Many Asian economies have tightly managed exchange rates with varying degrees of active management
 - Need for greater exchange rate flexibility, most notably in China

China

 - China RMB: appreciated modest 2.2% nominal year-to-date as of Oct 18, 2013
 - The most recent IMF Article IV, the IMF concluded that the RMB was moderately undervalued against a broad basket of currencies, and the IMF's Pilot External Sector Report estimates that the RMB was undervalued by about 5 to 10 percent on a real effective basis, as of July 2013.
 - Chinese authorities joined other G-20 members in pledging "not to target exchange rates for competitive purposes," at the Feb 2013 G-20 Finance Ministers and Central Bank Governors Meeting in Moscow.
 - China also committed to reduce the pace of reserve accumulation and increase the transparency of its exchange rate policy, at the 2012 G-20 Leaders Summit in Los Cabos, Mexico.
 - Even though official intervention fell from late 2011 ~ early 2012 due to lowered capital inflows into China, intervention resumed as these concerns receded, and PBOC and Chinese financial institutions collectively purchased a record $110 billion in foreign exchange in both Jan and Sep 2013.
 - Disclosure: China does not disclose its intervention in FX markets, but it should to increase the credibility of its monetary policy framework and to promote exchange rate and financial market transparency.

Japan: No intervention

 - Has not intervened in the FX markets in almost two years
 - Ruled out purchases of foreign assets as a monetary policy tool
 - Have refrained from public comment on the level of the exchange rate
 - Joined the G-20 statement in Feb 2013 (not targeting exchange rates for competitive purposes)
 - To support a stronger economic recovery and increase potential growth, Japan should calibrate the pace of fiscal consolidation to the recovery in domestic demand, and should increase domestic demand

Korea

 - Korean won moderately depreciated against the US dollar in the first half of 2013
 - IMF's July 2013 Pilot External Sector Report finds that Korea's real effective exchange rate remains undervalued in a range from 2 to 8 percent
 - Korean government does not public intervention data, but it should disclose shortly after an intervention
 - Estimated to have intervened to limit the pace of won appreciation and depreciation during 2013
 - Foreign exchange reserve stood at $326 billion as of end-Sep 2013

Conclusion

 - No major trading partner of US are manipulating the rate of exchange between their currency and the US dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade as identified in Section 3004 of the Act.
 - Treasury is pushing for comprehensive adherence to recent G-7 and G-20 commitments.