It’s never certain when the next US Treasury Foreign Exchange Report will be issued, but the report that was technically due in April is late. Amid a worldwide focus on global imbalances and the surge of Chinese exports, eyes may revert to whether the Treasury might designate China for currency manipulation. A case can be made either way, but pragmatism suggests it would be unwise to do so.
The case for designation
The FXR’s manipulation analysis is guided primarily by whether a country has a significant bilateral trade surplus with the US, has a material current account surplus over 3% of its gross domestic product and engages in persistent one-sided dollar purchases in intervention.
That China has a significant bilateral trade surplus with America and a material current account surplus is indisputable – even before recognising that China’s current account surplus may be significantly understated.
Assessing intervention criteria is more complicated. China’s central bank has largely eschewed dollar purchases. But there is evidence China’s state-owned commercial banks purchase dollars on behalf of the government, though the linkages and extent are debated. The Treasury has stated that, given the opacity of Chinese intervention, it will examine not only the central bank’s activities but also those of Chinese banks. Such activity increased in the second half of 2025, and the first half of 2026 also points to significant intervention to curb renminbi appreciation.
The Treasury observed in its last FXR that it could recommend opening a Section 301 investigation into a manipulator-designated country’s currency practices. President Donald Trump has said that ‘tariffs’ is the most beautiful word in the dictionary.
Though not one of the three criteria per se, currency undervaluation is another consideration. On the basis of work by the International Monetary Fund, looking at the gap between China’s current account surplus as a share of GDP relative to its norm suggests undervaluation in the order of 20%. Further, the real renminbi has fallen some 15% since early 2022.
Tripping the three criteria need not alone result in a manipulation finding, but in past years the Treasury mechanically designated Vietnam and Switzerland for doing so. Whether the Treasury got it right is a different matter.
The case against designation
Given China’s large global footprint, the renminbi’s role in supporting the massive current account surplus is problematic for the world economy. Renminbi undervaluation is part of a Chinese growth model that poses greater challenges. China’s economic system suppresses consumption and uses heavy state-owned enterprise support financed by state banks to undergird large-scale manufacturing production.
Especially now, given China’s weak domestic demand, production continues apace. Production unable to be absorbed domestically is often exported. That is occurring at a time when China’s bilateral surplus with the US is plunging and Europe is increasingly alarmed by what’s being called the ‘China shock 2.0’. China and the international community would be well served were China to tackle its growth model, which in and of itself would most likely support renminbi appreciation, assuming the capital account isn’t significantly opened up. Don’t hold your breath.
The renminbi has been appreciating, albeit hesitantly. It is up nearly 9% against the dollar from its post-Liberation Day lows. That is to be welcomed. Also, the renminbi is weighed down by capital outflow, including from factors beyond China’s control such as US equity market strength and recently a more hawkish repricing of the US yield curve.
It is unclear that designating China would achieve much and might be seen as a feckless act in markets. In August 2019, Trump in a fit of pique ordered the Treasury to declare China a currency manipulator. The designation, however, had zero impact on China and foreign exchange markets paid scant attention. The markets also had little reaction to the later designations of Switzerland and Vietnam. If the administration coupled designations with 301 investigations, as threatened, there could be more bite – but perhaps unintended consequences as well. Whether doing so is wise is an altogether different question.
Americans delude themselves by thinking that foreigners are responsible for US woes or that reckless fiscal policy isn’t the chief culprit behind US current account deficits. America needs to tackle its fiscal profligacy no matter what China does.
Overall US-China relations should be a factor as well. When the Trump administration placed large tariffs on China, President Xi Jinping retaliated by limiting rare earth exports. Subsequently, after the Busan summit, US tariffs were brought down, rare earth exports resumed and relations, while chilly, have been quieter amid an uneasy truce. Trump is also looking forward to another summit with Xi, potentially in September. Designating China could stir the pot. China could halt appreciation altogether.
A way forward
Renminbi appreciation is in China’s self-interest. An undervalued currency increases incentives for production. A stronger currency boosts real incomes and incentives for consumption and services. Accelerating the pace of renminbi appreciation could lessen global protectionist pressures.
As a sovereign country, China will make its own decisions. But its leadership will hear voices from abroad and weigh those alongside domestic interests.
Rather than leaning into possible ‘manipulation’ debates, the US should work with Europe and the G7 to press for faster renminbi appreciation. This is not a call for grandiose Plaza-type Accords for which nobody has a stomach. Rather, it’s a call for pragmatism. But does anybody trust locking arms with the US and will Beijing care?
Mark Sobel is Vice Chair and Chief Economist of OMFIF.
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