U.S. Drops South Korea from Currency Monitoring List, Focus Shifts to Economic Growth

Switzerland and South Korea were removed, and Vietnam was added to the list
Relieved of surveillance, less burden from foreign exchange intervention
Concerns over economic growth remain as the “recession-type surplus,” which falls short of the current account standard, continues

The United States has removed South Korea from the currency watch list. This is the first time in over seven years since its designation in April 2016. While the removal from the watch list is positive, concerns over economic growth remain as it is essentially due to a reduction in the current account surplus.

According to AFP, on the 7th (local time), the U.S. Department of the Treasury published the semi-annual currency report and released the list of currency watch countries.

The countries on the list are China, Germany, Malaysia, Singapore, Taiwan, and Vietnam. Vietnam was newly added, while South Korea and Switzerland, which were on the previous list, were removed.

The criteria for the currency watch list are a trade surplus of more than $15 billion in goods and services, a current account surplus exceeding 3% of GDP, and net dollar purchases exceeding 2% for eight months out of 12. If two of these criteria are met, the country is put on the watch list, and if all three are met, it is subject to intensive analysis. None of the six countries this time were subject to intensive analysis.

The Treasury Department stated, “Most of the foreign exchange interventions of U.S. trading partners during the report preparation period were in the form of dollar sales,” and that “This has helped strengthen the currencies of each country.” It added, “The Biden administration strongly opposes attempts by trading partners to manipulate currency values artificially.”

It also explained, “South Korea and Switzerland were removed from the watch list because they only met one of the three criteria for two consecutive times under the law enacted in 2015 (Trade Promotion Act).”

Being on the currency watch list does not entail any specific disadvantages. However, suppose a country is on the U.S. watch list. In that case, it is difficult for the authorities to intervene in the foreign exchange market even if exchange rate volatility increases in the future.

South Korea was included in the criteria for the U.S. trade surplus and current account surplus until last year, but from the previous report, only the U.S. trade surplus was applicable. In this report, South Korea’s current account surplus was analyzed as 0.5% of GDP.

Currently, South Korea is experiencing a ‘recession-type surplus,’ a surplus due to a decrease in imports rather than an increase in exports. According to the Bank of Korea’s announcement on the 8th, the current account surplus in September was $5.42 billion, marking a surplus for five consecutive months. Still, exports decreased by 2.4% compared to the previous year, while imports decreased by 14.3%. The Bank of Korea explained, “It seems that the semiconductor industry has passed the bottom and entered a recovery phase,” but added, “There are still uncertainties about how quickly the semiconductor industry and exports will recover depending on specific items and demand.”

Meanwhile, the U.S. Treasury Department warned China, saying, “China does not disclose the fact of foreign exchange intervention and lacks transparency in the exchange rate mechanism,” and “It continues to occupy an exceptional position among major economies.” Treasury Secretary Janet Yellen is scheduled to meet with Chinese Vice Premier Hu Chunhua in San Francisco for two days starting from the 9th to discuss the exchange rate. A Treasury official said during a briefing, “Officials are aiming to raise concerns about the lack of transparency in China’s currency policy over the next few weeks.”

By. Go Dae Young