The U.S. Treasury Department released a semi-annual report in April 2016 in which China, Japan, Korea, Taiwan and Germany were placed on a monitoring list as potential violators of fair currency practices. Countries on the list warrant enhanced scrutiny to determine if they are engaged in currency manipulation, which is monetary policy that provides an unfair trade advantage. Trade penalties could ensue if it is determined that a major trade partner violates fair practice guidelines and does not rectify any of these policies.
Currency manipulation occurs when monetary policy is implemented specifically to alter a currency in global foreign exchange markets. These policies are considered unfair trade practices when they are designed to maintain an artificial competitive advantage for a certain industry in the offending country. The most common incidence involves artificially raising the supply of an economy's tender to support its export industry. All else being equal, currency devaluation makes the exports from an economy cheaper in all other economies, thereby increasing demand for these products abroad. This can stimulate sectors such as manufacturing or basic materials, sending positive results throughout the wider domestic economy.
U.S. Corporate Financial Results
The financial results of corporations based in the United States can be impacted significantly by currency manipulation. When foreign countries devalue their currencies unfairly, exporters in the U.S. become less competitive in foreign markets, and foreign exporters gain an advantage in U.S. markets. American companies find it increasingly difficult to compete with foreign peers on a price basis. These factors also threaten business fundamentals, even if a competitive advantage is maintained.
The proportion of foreign-denominated sales tends to be higher than the proportion of foreign-denominated expenses for multinational corporations based in the U.S. Currency manipulation creates a scenario in which corporate operating profits are reduced, because the same volume of sales will now result in lower top-line results without a corresponding decrease in expenses. Such conditions also prompt corporate management teams to publish unofficial adjusted figures that control for fluctuations.
Retail investors suffer as a result. American investors hold roughly more than 75% of U.S. equity shares, so investors are jeopardized when American companies lose their competitive advantage. Lost profitability due to currency headwinds dampens earnings yields, limits cash flows and creates downward pressure on dividends and dividend growth. Adjusted figures and large currency distortions can complicate the fundamental research process, creating additional barriers for non-professionals.
U.S. Economic Well-Being
The same forces that impact corporate financial results can snowball into general economic problems. Chinese currency devaluation inflated the average annual U.S. trade deficit by several hundred billion dollars throughout the early 21st century, which had a negative effect on employment. The Economic Policy Institute estimates that Chinese currency devaluation cost 3.2 million American jobs between 2001 and 2013. Manufacturers and suppliers of basic materials tend to expand slowly or even contract due to currency manipulation, because they are at a competitive disadvantage against their foreign counterparts. This can also impact the growth of wages and disposable income, which are essential to healthy economic growth in developed economies.
A weak economy can stifle investment and reduce the investable income earned by Americans, as investors tend to become more conservative in times of uncertainty. Threats to economic stability contributed to the Federal Reserve's decision to delay interest rate moderation early in 2016. Low rates impact bond prices, and retirement savers continue to be pushed toward higher-risk fixed-income securities to achieve desirable yields for retirement income.
Global capital markets are impacted by currency manipulation, so the impacts extend beyond trade balance and export competitiveness. When foreign currencies depreciate relative to the dollar, investors often seek better returns in other markets, and U.S. equities markets are popular destinations for that displaced capital. Some economists have noted that the Japanese yen is a leading indicator of U.S. equity market peaks and troughs, with improving yen strength indicating repatriation of gains. The proportion of U.S. equities owned by foreign entities rose steadily from 1995 to 2015, and foreign holdings of U.S. corporate debt securities also trended upward during that period. Depreciation of foreign currency influences demand for American assets, which can cause bubbles in U.S. markets.