Foreign Exchange Policies 

of Major Trading Partners 

of the United States

REPORT TO CONGRESS

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

October 17, 2017
Contents

EXECUTIVE SUMMARY......................................................................................................................... 1

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS..................................... 6

U.S. ECONOMIC TRENDS .......................................................................................................................................6

INTERNATIONAL ECONOMIC TRENDS..................................................................................................................9

ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS...................................................... 15

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS.......................24

KEY CRITERIA ..................................................................................................................................................... 24

SUMMARY OF FINDINGS ..................................................................................................................................... 26

ANNEX I: FOREIGN EXCHANGE RESERVES – RECENT DEVELOPMENTS AND ADEQUACY 

MEASURES..............................................................................................................................................28

GLOSSARY OF KEY TERMS IN THE REPORT ...............................................................................32

This Report reviews developments in international economic and exchange rate policies 

and is submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22 

U.S.C. § 5305, and Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 

19 U.S.C. § 4421.1

 1 The Treasury Department has consulted with the Board of Governors of the Federal Reserve System and 

International Monetary Fund (IMF) management and staff in preparing this Report.
1

Executive Summary

This Administration places a very high priority on ensuring that American workers and 

companies face a level playing field when competing internationally. When our trading 

partners engage in currency manipulation, they impose significant, and often long-lasting, 

hardship on American workers and companies. Expanding trade in a way that is freer and 

fairer for all Americans requires that other economies avoid unfair currency practices and 

persistent exchange rate misalignments; that they refrain from competitive exchange rate 

devaluations; and that they not target exchange rates for competitive purposes. A stronger 

and fairer international trading system must also be supported by robust and better 

balanced growth globally, with domestic demand-led growth becoming a sustained engine 

for expansion in key economies that have large and persistent external surpluses. This 

Report, by monitoring where unfair currency practices may be emerging and encouraging 

policies and reforms to address large external surpluses, represents an important 

component of the Administration’s strategy for securing a stronger America and a more 

robust and fair global economy.

The Administration is working actively across a broad range of areas to help ensure a level 

playing field for our workers and companies. Through the U.S.-China Comprehensive 

Economic Dialogue, Treasury is pushing China to expand market access for U.S. goods and 

services and address industrial policies that unfairly discriminate against U.S. firms. A key 

objective in the context of the North American Free Trade Agreement (NAFTA) 

renegotiation is the adoption of an appropriate currency mechanism that ensures that 

NAFTA countries avoid manipulating exchange rates to gain an unfair competitive 

advantage, and Treasury is evaluating how similar mechanisms can be negotiated in the 

context of other free trade agreements. Treasury has also pressed for a stronger focus on 

exchange rate issues in key international venues, including the G-7, G-20, and the 

International Monetary Fund (IMF). Treasury continues to press the major trading 

partners of the United States to sustainably raise global output through robust domestic 

demand growth, underpinned by efficient tax systems with low rates and broad bases, 

sound monetary policies, and more stable exchange rates that can better support 

investment and growth.

The Administration remains deeply concerned by the significant imbalances in the global 

economy. Bilateral trade imbalances with many of our major trading partners have grown 

to very large levels. More broadly, current account surpluses in several major trading 

partners have not only been large but unusually persistent over the last decade. The IMF, 

in its 2017 External Sector Report, noted that of fifteen advanced economies with external 

surpluses in 2002, twelve also had surpluses in 2008 and eleven still had surpluses in 2016. 

The IMF further assessed that about one-third of the surpluses were excessive. These 

surpluses reflect extremely large amounts of saving, mostly corporate saving, in countries 

such as Germany, the Netherlands, Japan, and Korea that could have been used to support 

increased demand in those countries and increased imports from other countries. The IMF 

further identified that the real effective exchange rates in these countries with surpluses 

were generally undervalued. On a 20-year rolling average basis, the yen is more than 20 

percent below, and the euro is 4 percent below, its longer-term real effective rate.
2

The size and persistence of these external surpluses highlights the weakness of the global 

adjustment process, and the limited market pressure that economies with large surpluses 

face to pursue more balanced growth. But this global configuration of external positions is 

untenable. The United States should not and will not bear the burden of an international 

trading system that unfairly disadvantages our exports and unfairly advantages the exports 

of our trading partners, whether through imbalanced macroeconomic policies or unfair 

trade barriers. It is critical that our major trading partners durably avoid foreign exchange 

and macroeconomic policies that facilitate unfair competitive advantage. Treasury is 

committed to aggressively and vigilantly monitoring and combatting unfair currency 

practices. Treasury will also vigorously pursue an agenda to facilitate more balanced 

global growth and a reduction in global imbalances in the G-20 and other fora.

Treasury Assessments of Major Trading Partners 

Treasury has established thresholds for the three criteria specified in the Trade Facilitation 

and Trade Enforcement Act of 2015 (the “2015 Act”) that determine whether enhanced 

analysis is necessary: (1) a significant bilateral trade surplus with the United States is one 

that is at least $20 billion;2 (2) a material current account surplus is one that is at least 3 

percent of gross domestic product (GDP); and (3) persistent, one-sided intervention occurs 

when net purchases of foreign currency are conducted repeatedly and total at least 2 

percent of an economy’s GDP over a 12-month period.3 In 2016, the $20 billion bilateral 

trade surplus threshold captured almost 80 percent of the value of all trade surpluses with 

the United States, while the 3 percent current account threshold captured more than threefourths of the nominal value of global current account surpluses.

Pursuant to the 2015 Act, Treasury has found in this Report that no major trading 

partner met all three criteria during the four quarters ending June 2017. 

Similarly, based on the analysis in this Report, Treasury also concludes that no major 

trading partner of the United States met the standards identified in Section 3004 of 

the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) for currency 

manipulation in the first half of 2017. 

Notwithstanding these findings, Treasury has established a Monitoring List of major 

trading partners that merit close attention to their currency practices. An economy 

meeting two of the three criteria in the 2015 Act is placed on the Monitoring List. Once on 

the Monitoring List, an economy will remain there for at least two consecutive Reports to 

 2 Given data limitations, Treasury focuses in this Report on trade in goods, not including services. The United 

States has a surplus in services trade with many economies in this report, including Canada, China, Japan, 

Korea, Mexico, Switzerland, and the United Kingdom. Taking into account services trade would reduce the 

bilateral trade surplus of these economies with the United States.

3 In assessing the persistence of intervention, Treasury will consider an economy that is judged to have 

purchased foreign exchange on net for 8 of the 12 months to have met the threshold. These quantitative 

thresholds for the scale and persistence of intervention are considered sufficient on their own to meet the 

criterion. Other patterns of intervention, with lesser amounts or less frequent interventions, might also meet 

the criterion depending on the circumstances of the intervention.
3

help ensure that any improvement in performance versus the criteria is durable and is not 

due to temporary factors. As a further measure, this Administration will add and retain on 

the Monitoring List any major trading partner that accounts for a large and 

disproportionate share of the overall U.S. trade deficit even if that economy has not met 

two of the three criteria from the 2015 Act. In this Report, the Monitoring List 

comprises China, Japan, Korea, Germany, and Switzerland. 

With regard to the five economies on the Monitoring List: 

• China has an extremely large and persistent bilateral trade surplus with the United 

States, by far the largest among any of the United States’ major trading partners, with 

the goods trade surplus standing at $357 billion over the four quarters through June 

2017. Moreover, China continues to pursue a wide array of policies that limit market 

access for imported goods and services, and maintains a restrictive investment regime 

that adversely affects foreign investors. In comparison to the extremely large and 

persistent bilateral trade imbalance, China’s multilateral external position has 

undergone greater adjustment in recent years, with its current account surplus falling 

to 1.4 percent of GDP in the first half of 2017 from 1.8 percent of GDP in 2016, and 

down from 10 percent of GDP in 2007. Further, after engaging in one-way, large-scale 

intervention to resist appreciation of the renminbi (RMB) for a decade, China’s recent 

intervention in foreign exchange markets, tightened capital controls, and increased 

discretion over setting the daily fixing rate of the RMB have likely prevented a 

disorderly currency depreciation that would have had negative consequences for the 

United States, China, and the global economy. 

Treasury remains concerned by the lack of progress made in reducing the bilateral 

trade surplus with the United States. Further opening of China’s economy to U.S. goods 

and services as well as reducing the role of state intervention and allowing a greater 

role for market forces would provide more opportunities for American firms and 

workers to compete in Chinese markets and facilitate a more balanced economic 

relationship between the United States and China. Treasury places significant 

importance on China adhering to its G-20 commitments to refrain from engaging in 

competitive devaluation and to not target China’s exchange rate for competitive 

purposes. Treasury also places high importance on greater transparency of China’s 

exchange rate and reserve management operations and goals.

• Japan maintains the second-largest bilateral goods trade surplus with the United States, 

with a goods surplus of $69 billion over the four quarters through June 2017. Japan’s 

current account surplus over the four quarters through June 2017 was 3.7 percent of 

GDP, its highest level since 2010. Japan has not intervened in the foreign exchange 

market in almost six years. Treasury’s expectation is that in large, freely-traded 

exchange markets, intervention should be reserved only for very exceptional 

circumstances with appropriate prior consultations. Japan should take advantage of the 

current window of above-potential economic growth, underpinned by accommodative 

monetary policy and flexible fiscal policy, to enact critical structural reforms that can 
4

support a sustained expansion of domestic activity, create a more sustainable path for 

long-term growth, and help reduce Japan’s trade imbalances. 

• After several years of substantial asymmetric foreign exchange intervention to limit 

won appreciation in the context of large and growing current account surpluses, Korean 

authorities have reduced net foreign exchange intervention even as the exchange rate 

has appreciated moderately against the dollar. Treasury estimates that over the four 

quarters through June 2017, Korea on net purchased about $5 billion of foreign 

exchange (0.3 percent of GDP) to limit won appreciation. Korea’s current account 

surplus has also narrowed somewhat in the first half of 2017, to 5.3 percent of GDP. 

The IMF continues to describe Korea’s current account surplus as stronger, and its 

exchange rate as weaker, than justified by medium-term economic fundamentals. 

Korea has a significant bilateral trade surplus with the United States, with a goods 

surplus of $22 billion over the four quarters through June 2017. This is $8 billion 

smaller than the same period 12 months prior. It is important that the Korean 

authorities act to strengthen domestic demand and avoid reverting to excessive 

reliance on external demand for growth. Treasury will continue to closely monitor 

Korea’s currency practices and urges the authorities to enhance the transparency of its 

exchange rate intervention. 

• Germany has a very large bilateral goods trade surplus with the United States, at $63 

billion, and an extremely large current account surplus at 7.8 percent of GDP over the 

four quarters through June 2017. In nominal dollar terms, Germany has the world’s 

largest current account surplus at $270 billion. This surplus represents a substantial 

excess of German income over German domestic spending. Stronger demand growth in 

Germany will be a key factor going forward, as will be policies that raise Germany’s real 

effective exchange rate. Germany should take policy steps – including meaningful fiscal 

reforms to minimize burdens from elevated labor and value-added taxes – to encourage 

stronger domestic demand growth, which would place upward pressure on the euro’s 

nominal and real effective exchange rates and help reduce its large external imbalances. 

The European Central Bank (ECB) has not intervened unilaterally in foreign currency 

markets in over 15 years.4 

• Switzerland over the past few years has used foreign exchange purchases to help 

counter pressures from safe haven inflows and deflationary forces. Switzerland has 

space to deploy fiscal policy more forcefully to support domestic economic activity, and 

could also rely more heavily on traditional monetary policy tools (e.g., interest rates) to 

combat deflationary pressures, which would help reduce the need for foreign exchange 

intervention. Switzerland has a large current account surplus at 10.3 percent of GDP

over the four quarters through June 2017, and the seventh largest surplus in the world 

in nominal dollar terms at $69 billion. Per Treasury estimates, Switzerland engaged in 

sizable, one-sided foreign exchange purchases over the four quarters through June 

2017. Though Switzerland’s economic policy situation is distinctive given its small 

 4 For the purposes of Section 701 of the 2015 Act, policies of the ECB, which holds responsibility for monetary 

policy for the euro area, will be assessed as the monetary authority of individual euro area countries. 
5

stock of domestic assets, which limits monetary policy options to address deflationary 

pressures and safe-haven inflows, Switzerland could increase reliance on policy rates in 

order to limit the need for foreign exchange interventions. Moreover, Treasury urges 

the authorities to enhance the transparency of exchange rate intervention.

Taiwan has been removed from the Monitoring List in this Report. Taiwan has met only 

one out of three criteria – a material current surplus – for two consecutive Reports. Since 

the April 2017 Report, Taiwan has also continued to reduce the scale of its foreign 

exchange intervention. Treasury estimates that over the first half of 2017, Taiwan’s net 

foreign currency purchases were around $3 billion, roughly half the level over the same 

period last year, while net purchases over the four quarters through June 2017 were 

around $5 billion (0.9 percent of GDP). Nonetheless, Treasury will continue to urge 

Taiwan’s authorities to further increase the transparency of foreign exchange market 

intervention and reserve holdings, as Taiwan is the only major emerging market economy 

in Asia not to publish data on the full details of its international reserves in accordance with 

the IMF Data Template on International Reserves and Foreign Currency Liquidity.

Over the first half of 2017, there has been a notable increase in the scale and persistence of 

India’s net foreign exchange purchases, which have risen to around $42 billion (1.8 percent 

of GDP) over the four quarters through June 2017. India has a significant bilateral goods 

trade surplus with the United States, totaling $23 billion over the four quarters through 

June 2017. Treasury will be closely monitoring India’s foreign exchange and 

macroeconomic policies.
6

Section 1: Global Economic and External Developments

This Report covers economic, trade, and exchange rate developments for the first six 

months of 2017 and, where data are available, developments through end-September 2017. 

This Report covers developments in the 12 largest trading partners of the United States, as 

well as Switzerland, which is currently the United States’ 14th largest trading partner.5

These economies’ total goods trade with the United States amounted to $2.7 trillion over 

the four quarters through June 2017, over 70 percent of all U.S. goods trade during that 

period. For some parts of the analysis, especially those parts having to do with Section 701 

of the 2015 Act, data over the most recent four quarters for which data are available are 

considered (typically up through the second quarter of 2017). 

U.S. Economic Trends

The U.S. economy expanded at a moderate pace over the first half of 2017, growing at an 

average annual rate of 2.1 percent. Despite a weak first quarter, private domestic final 

demand has picked up noticeably, rising by 3.2 percent in the first half of 2017 after 

advancing 2.6 percent in the latter half of 2016. When measured on a year-over-year basis, 

U.S. economic growth has strengthened every quarter since mid-2016. 

Sound fundamentals, including strong labor markets, upbeat consumer sentiment, solid

household finances, and a healthy outlook for business activity, are likely to propel private 

domestic demand in the coming quarters. Inflation remains moderate, and low interest 

rates continue to support credit markets. As of early October, a consensus of private 

forecasters predicted that real GDP would expand at 2.5 percent in the second half of 2017 

(at an annual rate) and at a rate of 2.2 percent for the whole of the year (measured on a 

year-over-year basis). While preliminary estimates suggest that Hurricanes Harvey and 

Irma could shave 0.8 percentage point from growth in the third quarter, a similar-sized

boost is expected in the fourth quarter as output returns to its pre-hurricanes level, a 

portion of the delayed spending is made up, and outlays for clean-up and rebuilding occur.

Growth was already expected to accelerate to 2.4 percent in 2018, and hurricane-related 

spending may provide an additional bump in the early part of next year.

Recent U.S. Growth Performance

Real GDP expanded at an average annual rate of 2.1 percent over the first half of this year, 

slightly below the 2.3 percent rate in the second half of 2016 but well above the 1.4 percent

rate over the first half. Domestic final demand remained firm. Consumer spending 

contributed 1.8 percentage points to GDP growth in the first half of 2017, a few ticks shy of 

the 2.0 percentage points added in the second half of 2016. Business fixed investment 

contributed 0.9 percentage point to growth in the first half of 2017, building on a 0.2 

percent contribution in the last half of 2016. Residential investment made a modest 0.1 

percentage point contribution. In addition to domestic demand, net exports added 0.2 

 5 Switzerland is included in this Report as it has previously appeared on Treasury’s Monitoring List in the 

October 2016 and April 2017 Reports.
7

percentage point to growth in the first half of 2017, a marked improvement from the 0.6 

percentage point drag posed in the final two quarters of last year. Only inventory 

investment proved to be a negative factor over the first half of the year, while government 

expenditures were roughly neutral. Inventory drawdown subtracted 0.7 percentage point 

from growth in the first two quarters of 2017, after adding 0.6 percentage point in the final 

two quarters of 2016. Government spending held down growth by 0.1 percentage point in 

the first half of 2017, offsetting its small positive contribution in the second half of 2016.

Sound Fundamentals

The pace of job creation has remained solid in 2017, and the unemployment rate has fallen 

further. Nonfarm payroll employment added 148,000 jobs per month, on average, during 

the current year through September, moderating from last year’s monthly average of 

187,000. In the three months prior to September’s hurricane-related decline in payroll job 

creation, however, nonfarm payroll employment averaged 172,000 per month, only a bit 

below last year’s pace. The unemployment rate fell to 4.2 percent in September, a sixteenyear low, and well below the 10 percent peak of 2009. Other measures of labor market 

conditions continue to improve, including a rise in the labor force participation rate and 

decline in involuntary part-time employment, the latter to its lowest level in a decade. 

Consumer sentiment is at a fresh thirteen-year high as of early October, with households 

expressing positive views about current as well as future economic conditions. While 

measures of compensation have mostly firmed over recent years, the pace of improvement 

has been disappointing. Average hourly earnings rose 2.5 percent over the twelve months 

ending September 2017, stepping up from the year-over-year rates that prevailed from 

2011 through 2015 but dipping below the 2.7 percent seen in the second half of 2016.

Total compensation costs for civilian workers advanced 2.4 percent in the four quarters 

ending in June 2017, a tick higher than the year-earlier pace. Despite the slow growth in 

nominal earnings, the debt-service ratio facing households has steadily declined to a record 

low, owing to a relatively stable level of mortgage debt and low interest rates. Moreover,

the value of home equity has more than doubled since mid-2011 and household net worth 

stands at a record high. 

Business activity is also expanding at a healthy pace. According to the most recent survey 

of the Institute for Supply Management (ISM), manufacturing growth accelerated in 

September to a thirteen-year high. Seventeen of 18 industries reported expansion, while 

one industry reported contraction. The ISM’s non-manufacturing index also pointed to 

faster expansion in the services sector in September. After several weak quarters in 2015 

and early 2016, business fixed investment has firmed, with a notable pick-up in the first 

half of 2017 when it grew at an average annual rate of 7.0 percent. 

Although headline inflation turned up in mid-2016 with the recovery in energy prices, a 

pullback in oil prices caused a deceleration starting in early spring 2017. The consumer 

price index (CPI) for all items rose 2.2 percent over the twelve months ending in September 

2017, one-half percentage point below the 2.7 percent rate seen in February 2017 but 

faster than the 1.5 percent increase over the twelve months ending in September 2016. 
8

Growth in the core CPI (which excludes food and energy prices) remains stable but 

relatively low. As of September 2017, core inflation has run at 1.7 percent (year-over-year) 

for five consecutive months, after accelerating to 2.3 percent in January 2017.

Fiscal Policy and Public Finances

As fiscal consolidation has taken hold in recent years, the government sector has made a 

largely neutral contribution to growth. On an inflation-adjusted basis, total government 

expenditures in the second quarter of 2017 were slightly lower than the year-earlier level, 

with federal spending up slightly and state and local spending down a bit. Although 

Congress has not yet finalized spending levels for the coming fiscal year, the House of 

Representative’s budget resolution largely aligns with the President’s proposals, suggesting 

that government spending will have a small economic impact in coming quarters. The 

Administration’s mid-session review of the fiscal year (FY) 2018 Budget projects 

discretionary nondefense spending to decline to 3.1 percent of GDP, down from an 

estimated 3.3 percent of GDP in FY2017. In FY2016, the federal budget deficit was 3.2 

percent of GDP. Debt held by the public rose to $14.2 trillion in FY2016. As a share of the 

economy, publicly held debt rose from 73.3 percent at the end of FY2015 to 77.0 percent at 

the end of FY2016. The Administration projects debt to peak at 77.9 percent in FY2017 

before declining due to its policy proposals.

U.S. Current Account and Trade Balances

The U.S. current account was in 

deficit by 2.5 percent of GDP in 

the first half of 2017, rising 

slightly from 2.4 percent in the 

second half of 2016. This 

widening of the current account 

deficit was driven by the goods 

trade balance, which 

deteriorated by $24 billion in the 

first half of 2017 compared to 

the second half of 2016. A 

modest pick-up in the surplus on 

income helped offset a portion of 

the larger goods trade deficit. 

The headline U.S. current account deficit has been relatively stable since 2015 at around 

21⁄2 percent of GDP. On its face, this would seem to suggest that the U.S. external sector has 

been relatively resilient to the effects of the dollar strengthening trend that was witnessed 

from mid-2014 through the end of 2016. Developments in the non-oil goods balance call 

this conclusion into question. The non-oil goods deficit widened to 3.8 percent of GDP in 

the first half of 2017, equal to its peak post-crisis level. Further, the decline in the non-oil 

goods balance has been concentrated among the manufactured goods that might be 

-5

-4

-3

-2

-1

0

1

2

3

H1 2010H2 2010H1 2011H2 2011H1 2012H2 2012H1 2013H2 2013H1 2014H2 2014H1 2015H2 2015H1 2016H2 2016H1 2017

Percent of GDP

U.S. Current Account Balance

Income Services Goods Current Account Balance

Sources: Bureau of Economic Analysis, Haver
9

expected to be more sensitive to 

exchange rate developments.6 

The relative stability of the U.S. 

goods trade balance – and the 

overall current account – has 

been supported by the 

significant narrowing of U.S. 

petroleum deficit, reflecting 

increased domestic oil 

production and lower world oil 

prices. 

At the end of the second quarter 

of 2017, the U.S. net international investment position stood at a deficit of $7.9 trillion (41.2 

percent of GDP), an improvement of more than $380 billion compared to six months 

earlier. The value of U.S.-owned foreign assets was $25.9 trillion, while the value of 

foreign-owned U.S. assets stood at $33.9 trillion. The improvement in the net position over 

the last six months has been supported by valuation effects that increased the dollar value 

of U.S. assets held abroad. 

International Economic Trends

Over the first half of 2017, global 

growth strengthened broadly. 

Powered by a synchronized and 

sustained expansion across 

major economies over the first 

half of the year, the global 

economy finally achieved a longawaited acceleration after 

several years of lackluster 

growth. The pick-up in growth is 

helping narrow output gaps in 

economies where the effects of 

the global financial crisis have 

lingered, and is reflected particularly in strong employment gains across major advanced 

economies. Wage and inflation dynamics, on the other hand, remain muted in most 

economies, with inflation expectations still below pre-crisis levels in most advanced 

economies and inflation continuing to moderate across many emerging market economies. 

The persistent weakness of both wages and inflation in the post-crisis era reflects in part 

anemic productivity growth. While it appears that productivity has been hampered by 

 6 Specifically, almost 80 percent of the decline in the non-oil goods balance relative to 2014 is accounted for 

by a deterioration in the trade balances for automobiles, capital goods, and consumer goods, reflecting both 

lower exports and higher imports (in nominal terms) across all three categories.

-7

-6

-5

-4

-3

-2

-1

0

2005 2007 2009 2011 2013 2015

Percent of GDP

U.S. Goods Balance

Non-Oil Balance

Oil Balance

Source: Bureau of Economic Analysis

-3

0

3

6

9

Percent change (annualized rate)

GDP Growth

H2 2016 H1 2017

Sources: National Authorities, Haver
10

both cyclical and structural factors, untangling the key drivers – and formulating remedies 

– remains one of the preeminent challenges for economic policymakers.

Near-term growth expectations have remained firm, as reflected in continued asset price 

gains and strong readings of consumer and business confidence. However, the outlook 

remains modest within a historical context, particularly for advanced economies. The IMF, 

in its October 2017 forecast, projects that advanced economies will grow steadily over the 

next 18 months, expanding 2.2 percent in 2017 and 2.0 percent in 2018. While this would 

represent an improvement over the middling 1.6 percent pace of growth advanced 

economies averaged from 2011-2016, it is still well below the 2.7 percent average growth 

they achieved from 1990-2006. Emerging market economy growth looks to be more 

robust, with the IMF forecasting expansion of 4.6 percent in 2017 and 4.8 percent in 2018, 

which would be broadly in line with the 4.7 percent average pace of growth from 1990-

2006.

Global Imbalances

For much of the period since 2000, the global economy has been characterized by large 

global imbalances, in particular elevated surpluses in the rapidly industrializing Asian 

economies (most notably China) and in northern Europe (notably Germany), paired with a 

large deficit in the United States. The collapse in global demand triggered by the financial 

crisis narrowed imbalances, but also substantially lowered global growth as output gaps 

opened in both deficit and surplus economies. Rather than achieving a symmetric 

adjustment of global imbalances that would have supported global growth – encompassing 

supportive macroeconomic policies to boost demand in surplus economies and corrective 

policies to address fiscal and external imbalances in deficit economies – the global economy 

was hampered by a coordinated shift to restrictive fiscal policies, as not only deficit but also 

surplus 

economies 

attempted to 

strengthen their 

public finances. 

Though global 

imbalances are 

smaller than at 

their peak, they 

remain more than 

twice as large as a 

share of global 

GDP than in the 

mid-1990s, and 

the surpluses 

among many 

economies 

continue to be 

excessively large.

-3

-2

-1

0

1

2

3

1980198219841986198819901992199419961998200020022004200620082010201220142016

Percent of Global GDP

Global Current Account Imbalances

United States Oil Exporters Germany Other Euro Area

China Other East Asia Other Surplus Other Deficit

Sources: IMF WEO, Haver
11

As the IMF has recently noted in its 2017 External Sector Report, the persistence of large 

current account surpluses has been a historically unusual feature of the global economy 

over the last 15 years. The IMF noted that of 15 advanced economies that had external 

surpluses in 2002, 12 still had them in 2008 and 11 still had them in 2016. In several 

instances, the surpluses have grown larger. During the mid-2000s, almost the entirety of 

current account surpluses globally – more than 90 percent – was accounted for by 

economies that had a current account surplus of at least 3 percent of GDP for at least three 

years. Though the share of these large and persistent surpluses has receded to around 60 

percent of global current account surpluses, they remain higher than at any point since the 

mid-1980s. One result of the strong persistence of current account surpluses is that stock 

imbalances have 

grown dramatically 

over the last decade 

as most large 

surplus economies 

now have sizeable 

(and expanding) 

stocks of net foreign 

claims. These claims 

represent unspent 

funds by surplus 

economies, posing a 

risk to strong, 

sustainable, and 

balanced global 

growth. 

Among major U.S. 

trading partners, the 

very large surpluses 

of Germany, Japan, Korea, Taiwan, and Switzerland have each remained significant as a 

share of GDP, with the combined surpluses of these economies totaling $678 billion 

(equivalent to 0.9 percent of global GDP) over the four quarters through June 2017. China’s 

surplus has narrowed over the last two years, reaching 1.3 percent of GDP in the four 

quarters through June 2017, but remains the third largest in the world in nominal terms at 

$155 billion.

Across most large surplus economies, the imbalance between saving and investment has 

increasingly reflected large and growing saving by the corporate sector. In several 

economies – including Germany, Japan, and Korea, though not China – it has also reflected 

relatively weak trends in both public and private investment. Given the still-lingering 

output gaps in the global economy in the aftermath of the financial crisis, global growth 

could be stronger, more sustainable, and more balanced if the excess saving in large 

surplus economies was productively channeled into increased demand in these economies, 

which would help boost imports from other countries and support global trade. This 

should be facilitated by a comprehensive policy approach that utilizes all policy levers –

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-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1982 1986 1990 1994 1998 2002 2006 2010 2014

Global Current Account Imbalances

Large Deficit (>3% GDP)

Large Surplus (>3% GDP)

Persistent Large Deficit (>3% GDP for 3+yrs)

Persistent Large Surplus (>3% GDP for 3+yrs)

Source: IMF WEO

Note: The bottom (top) half of the chart depicts shares of the total value of global current 

account deficits (surpluses), with the deficit shares being given a negative sign. Share of the Total Value of Global Current Account Surpluses/Deficits
12

fiscal, monetary, and structural policies – to raise domestic demand above GDP growth in 

surplus economies. 

Global adjustment should also be supported by consonant shifts in exchange rates. In its

2017 External Sector Report, the IMF found that real effective exchange rates among 

several major economies with large and persistent surpluses remained undervalued on 

average in 2016. Moreover, few surplus economies have seen significant changes in their 

real effective exchange rates this year that meaningfully reduce the estimated 

misalignment.

7

Capital Flows 

Private capital outflows from China – one of the major trends that defined global capital 

flows over the last two years – slowed significantly in early 2017, while net capital flows to 

other emerging markets remained comparably small and positive in aggregate. In China, 

the deceleration comes after two years of large net private outflows related to concerns 

over slowing Chinese growth and financial stability risks. A variety of domestic policies 

and global developments over the last year have contributed to the reduction in outflow 

pressures: tightened capital controls on outbound direct investment and cross-border 

borrowing sharply curtailed resident outflows in 2017 (the largest component of net 

 7 While several major economies have witnessed notable movements in their REER this year relative to end2016 levels, the moves relative to average 2016 levels – which are the basis for the IMF’s estimates of 

misalignments – have generally been much more modest.

-20

-10

0

10

20

United States

France

U.K.

Canada

Brazil

India

Mexico

Italy

China

Switzerland

Japan

Korea

Germany

Percent

2016 REER Misalignment (mid)1 2017 YTD REER ∆2

CA Deficit Economies CA Surplus Economies

IMF Estimates of Exchange Rate Misalignment

Source: IMF 2017 External Sector Report, BIS REER Indices

1/The IMF's estimate of real effective exchange rate (REER) misalignment (expressed as a range) compares 

the country's average REER in 2016 to the level consistent with the country's medium-term economic 

fundamentals and desired policies. The midpoint of the misalignment range is depicted above.

2/Change through August 2017 versus 2016 average.

Note: The IMF does not provide an estimate of Taiwan's REER misalignment.
13

outflows in prior years), higher 

domestic growth expectations 

attracted the highest level of 

non-foreign direct investment 

inflows since early 2014, and the 

weakening of the dollar in 2017 

eased downward pressure on 

the RMB. At their current pace, 

capital outflows from China are 

on track to reach only a fraction 

of their 2015 and 2016 levels. 

Aggregate net private capital inflows into emerging markets other than China picked up 

slightly in the first quarter of 2017 over the prior quarter. Sentiment toward emerging 

markets continued to improve as strong growth in early 2017 across major economies 

pointed to a synchronized global expansion. Capital flows remained concentrated among 

the larger emerging market economies, albeit remained small in nominal terms compared 

to flows to the advanced economies and China. Foreign direct investment continued to 

represent the majority of net capital inflows, though net portfolio debt inflows increased 

notably in early 2017. 

Foreign Exchange Markets

The dollar depreciated on a nominal, trade-weighted basis by roughly 7 percent over the 

first nine months of 2017, more than reversing the 5.9 percent appreciation over the 

second half of 2016. The dollar’s decline was broad-based, depreciating against most 

major and emerging market currencies alike. The dollar’s decline was gradual over the 

course of the year, reflecting delayed expectations for both U.S. fiscal stimulus and further 

U.S. monetary policy tightening, as well as strengthening growth in foreign economies. 

Most major currencies outside the United States either appreciated or were on net little 

changed on a nominal, trade-weighted basis over the first nine months of 2017. The 

Mexican peso increased the most among currencies covered by this Report, recovering

strongly on a trade-weighted basis from the large depreciation in the second half of 2016 as 

concerns over the regional economic outlook and trade relationships subsided. The euro 

and Canadian dollar both 

appreciated more than 5 percent 

on a trade-weighted basis, as 

growth accelerated and 

expectations for monetary policy 

moved in a less accommodative 

direction. Shifts in the euro area 

outlook also relieved safe-haven 

inflow pressures on the Swiss 

franc, which fell by 3.5 percent 

on a trade-weighted basis in the 

third quarter. Though the trade- -15 -10 -5 0 5 10 15

Brazil

India

Japan

China

Switzerland

Korea

Taiwan

Canada

UK

Euro

Mexico

Percent change (relative to end-June 2016)

H2 2016

H1 2017

Q3 2017

Sources: FRB, Haver

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016

USD Billions

Capital Flows to Emerging Markets

EM excluding China China

Note: Financial account (excluding reserves) adjusted for errors and omissions. 

Chart shows Q1 data only for 2017.

Source: IMF
14

weighted Brazilian real is only 2 

percent lower on net this year 

through end-September, it fell by 

as much as 5 percent over the 

first half of the year amid 

political turbulence before 

gaining back most of that decline 

in the third quarter as the 

economic recovery appeared to 

gain firmer footing. 

Treasury judges that foreign 

exchange markets have generally 

functioned smoothly, including around increases in the Federal Reserve’s policy rate 

corridor in both March and June. Compared to the second half of 2016, net changes in most 

nominal effective exchange rates in the first half of 2017 were generally smaller, reflecting 

the improving growth outlook and greater global policy clarity. The U.S. dollar continues to

be the world’s principal currency in international foreign exchange markets, being bought 

or sold in 88 percent of all currency trades, according to the most recent (2016) Bank for 

International Settlements (BIS) Triennial Survey of foreign exchange activity.

Foreign Exchange Reserves 

Global foreign currency reserves increased in the first half of 2017 by nearly $330 billion

on net in nominal terms, surpassing $11 trillion in June 2017. The headline increase in 

global reserves in 2017 offset the $300 billion decline over the second half of 2016, 

stabilizing the level of global reserves within the range where it has remained over the past 

year. The rise in headline reserve levels globally over the first half of 2017 was primarily a 

byproduct of valuation changes, and particularly the depreciation of the dollar, which 

boosted the dollar value of other reserve holdings. Nonetheless, even after accounting for 

valuation effects, there was net accumulation of reserves at the global level in the first half 

of 2017, a reversal of the pattern observed over the previous two years, during which many

economies engaged in reserve asset sales to stem or slow the depreciation of their 

currencies. Among the economies included in this Report, Switzerland’s reserves increased 

by $90 billion in the context of continued foreign exchange purchases, while China’s 

headline reserves rose by over $45 billion despite continued foreign exchange sales 

(though the pace of sales was much reduced compared to the prior two years).

A more in-depth discussion of foreign exchange reserves adequacy can be found in Annex I. 

-15

-10

-5

0

5

10

15

Mexico

Euro

Canada

Taiwan

UK

Korea

Japan

China

India

Brazil

Switzerland

United States

Percent

Nominal Effective Exchange Rates

H2 2016 H1 2017 Q3 2017

Source: BIS
15

Economic Developments in Selected Major Trading Partners

China

China‘s goods trade surplus with the United States over the four quarters through June

2017 was $357 billion, by far the largest of any major trading partner of the United States. 

Because of global value chains, in which economies such as Taiwan, Korea, Japan, and 

Southeast Asian economies send inputs and parts to China for manufacturing and re-export 

to the United States, the bilateral trade surplus is likely overstated.8 But even accounting 

for global value chains, the bilateral deficit of the United States stands out and must be 

addressed through a combination of structural adjustments in China, including reduced 

barriers to goods and services imports from the United States, and macroeconomic policies 

that support consumption growth in China.

Treasury is concerned by the lack of progress made in reducing the bilateral trade surplus. 

China should take concrete steps to level the playing field for American workers and firms. 

This means addressing the adverse impact of China’s industrial, agricultural, technological, 

and cyber policies on market access for U.S. firms. Further opening of the Chinese economy 

to U.S. goods and services, as well as reducing the role of state intervention and allowing a 

greater role for market forces, would provide more opportunities for American firms and 

 8 The Organization for Economic Co-operation and Development (OECD) estimates that in 2011, the 

difference between the domestic value-added content of China’s exports to the United States and the United 

States’ exports to China was $153 billion, meaning that China’s trade surplus with the United States in valueadded terms was around half the size of the nominal trade surplus. This gap has likely narrowed in recent 

years as China has increased the share of value added in its exports. 

Table 1: Foreign Exchange Reserves

Brazil 702% 18%

India 412% 16%

China 360% 27%

Mexico 323% 16%

Korea 322% 25%

Taiwan 264% 81%

Switzerland 72% 109%

Japan 47% 24%

Canada 12% 5%

Italy 4% 2%

UK 2% 5%

Germany 2% 1%

France 2% 2%

Foreign exchange reserves as of June 2017.

GDP measured as the 4Q rolling sum through Q2 2017.

Sources: National authorities, World Bank, IMF, Haver

Short-term debt consists of gross external debt with 

remaining maturity of one year or less, as of Q1-2017.

FX Reserves as % of 

short term debt

FX reserves as

% of GDP

-400 -300 -200 -100 0 100 200 300 400

World

Switzerland

China

Japan

India

UK

Brazil

Korea

Taiwan

Canada

Mexico

USD Billions

H2 2016

H1 2017

Note: Includes valuation effects

Sources: IMF, Haver

Change in Foreign Currency Reserves
16

workers to compete in Chinese markets and facilitate a reduction in the trade and 

investment imbalance between the United States and China.

In the first half of 2017, China’s goods surplus with the United States expanded by $9.8 

billion to $171 billion relative to the same period in 2016, despite a 16 percent increase in 

the value of U.S. exports to China. While U.S. firms notably increased soybean, automotive, 

and scrap shipments to China, U.S. imports of Chinese goods – particularly cellphone and 

other electronics – increased by more. The relatively modest U.S. services trade surplus 

with China expanded by $1.1 billion to $19.9 billion in the first half of 2017, compared to 

the first half of 2016. 

In contrast to the large bilateral surplus with the United States, China runs trade deficits 

with many other economies, and 

as such, has a smaller overall 

trade and current account 

surplus globally. China’s current 

account surplus narrowed in 

nominal terms in the first half of 

2017 to $82 billion (1.4 percent 

of GDP) from $126 billion (2.3

percent of GDP) in the first half 

of 2016 and remains significantly 

below its 2007 half year peak of 

over 10 percent of GDP. Of the 

$44 billion decline, the largest 

share ($26 billion) reflected an 

expanded services trade deficit 

driven by increased Chinese 

foreign travel expenditure. The 

goods trade surplus declined by 

$20 billion, largely reflecting an 

increase in imports. China’s 

primary income deficit made a 

smaller contribution, declining 

by $5.9 billion in the first half of 

2017 compared to the first half 

of 2016. 

The Chinese currency has moved recently in a direction that would help correct the 

bilateral trade imbalance with the United States, but on a trade-weighted basis, the 

currency has become more competitive globally. Through the end of September, the 

renminbi has strengthened 4.4 percent against the dollar and weakened 0.5 percent against 

China’s CFETS nominal basket.9 Further, on a real, trade-weighted basis, China’s currency 

 9 The China Foreign Exchange Trade System (CFETS) RMB index is a trade-weighted basket of 24 currencies 

published by the People’s Bank of China.

-5

0

5

10

2007200820092010201120122013201420152016

20171H

Percent of GDP

China: Current Account Balance

Income Services Goods Current Account Balance

Sources: SAFE, Haver

86

90

94

98

102

106

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Indexed December 2014 = 100

China: Exchange Rates

CFETS CNY/USD (Daily Close)

Sources: CFETS, Bloomberg
17

depreciated 2.7 percent through August 2017. U.S. dollar weakness, an improved nearterm Chinese economic growth outlook, and reassertion of control by the central bank over 

the daily fixing rate of the renminbi likely contributed to the relative stabilization of the 

currency and contributed to a decline in net Chinese capital outflows. Tightened capital 

controls also likely aided a reduction in net outflows (excluding the trade surplus and net 

direct investment inflows) in the first half of 2017 to an estimated $160 billion, compared 

to $290 billion during the same period in 2016. Research by staff at the Federal Reserve 

Board suggests that capital controls have possibly been circumvented to some extent by 

Chinese residents’ acquisition of foreign assets abroad mis-recorded as services imports.10 

This circumvention effectively results in an understatement of China’s current account

surplus by inflating import figures with transactions that should be included in China’s 

financial account. 

China does not publish its 

foreign exchange market 

intervention, but Treasury 

estimates that Chinese 

authorities significantly curtailed 

intervention to support the value 

of the renminbi in the first half of 

2017 as depreciation pressures 

abated due to Chinese capital 

control measures and higher 

growth expectations. Foreign 

exchange reserves sold in the 

first six months of the year are 

estimated at $62 billion, a pace of sales which is less than one-third of that witnessed over 

2016 on average. As of August, Chinese foreign exchange reserves were valued at $3.1

trillion, which is above standard measures of reserve adequacy.

Real GDP in the second quarter of 2017 grew 6.9 percent relative to the same period in 

2016, unchanged from the previous quarter, but higher than the annual rate of 6.7 percent 

in 2016. Economic momentum has remained solid despite some recent monetary and 

financial regulatory tightening. Consumption represented the largest contributor to 

China’s economic growth in the first half of 2017, indicating some progress toward 

rebalancing the economy, but consumption continues to represent a relatively low share of 

GDP relative to fixed investment. Monetary policy is tighter compared to 2016, although 

still fairly accommodative. While the rate of credit expansion – particularly shadow credit 

growth – has come down since the beginning of the year due to China’s regulatory efforts, 

Treasury staff estimate that total nominal credit growth, after factoring in local 

government bond swaps and shadow credit activity, amounted to roughly 14 percent in 

August, still higher than nominal GDP growth. Meanwhile, new lending to the real economy 

remains strong due to longer-term corporate and mortgage lending. 

 10 Wong, Anna (2017). China’s Current Account: External Rebalancing or Capital Flight? International Finance 

Discussion Papers 1208.

-150

-100

-50

0

50

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Billion U.S. Dollars

China: FX Intervention

Preferred Methodology* Bank FX Settlement

Sources: PBOC, SAFE, U.S. Treasury Estimates

*Based on change in FX-denominated assets on PBOC balance sheet
18

Japan

Japan’s current account surplus 

remained elevated but steady in 

the first half of 2017 at $90 

billion (3.7 percent of GDP). 

From July 2016 to June 2017, the 

current account surplus was 3.7 

percent of GDP, up from a 

surplus of 3.4 percent of GDP for 

the same period 12 months prior. 

While a reduction in the services 

trade deficit has played a role, 

the elevated current account surplus continues to be driven by high net foreign income, 

which accounted for over 85 percent of the overall surplus in the first half of 2017 (see 

chart). Many years of continual surpluses have produced sizable net foreign assets: 

Japan’s net international investment position stood at 61 percent of GDP in 2016, the 

highest in the G-7, and the IMF projects it will rise to 85 percent in the medium term, 

suggesting sizable net foreign income flows for years to come.

11

Japan’s goods trade balance 

moved from deficit into surplus 

in 2016 for the first time since 

the 2011 earthquake –

supported in part by low oil 

prices – and has remained in 

surplus in the first half of 2017, 

albeit modestly lower compared 

to 2016. Japan’s seasonally 

adjusted trade balance 

(including both goods and 

services, on a yen-basis) also 

declined slightly in the first half 

of 2017 but remains in surplus. Rising imports on the back of strong domestic demand 

have been a factor in a lower trade surplus, even as export volumes increased substantially 

between January and April, with average annual increases of 5.0 percent for the first six 

months of 2017 compared to average annual decreases of 2.3 percent for the same period 

one year earlier. Japan’s goods trade surplus with the United States in the first half of 2017 

was $34 billion, unchanged from the first half of 2016. As Japan runs services trade deficits 

with the United States, its overall trade surplus (goods plus services, seasonally adjusted) 

was $28 billion in the first half of 2017, about the same as a year earlier. Treasury remains 

concerned by the persistence of the large bilateral trade imbalance between the United 

States and Japan.

 11 Net international investment position figures and estimates from the IMF 2017 External Sector Report.

-3

0

3

6

200720082009201020112012201320142015

2016

H1 2017

Percent of GDP

Japan: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Japan, Ministry of Finance, Cabinet Office 

80

100

120

140

160

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17

Indexed December 2014 = 100

Japan: Exchange Rates

REER NEER JPY/USD

Sources: Bank of Japan, BIS
19

After a year of significant movement in the dollar-yen exchange rate, 2017 has seen steady 

but moderate yen appreciation against a backdrop of dollar weakness. As of endSeptember, the yen had appreciated 3.7 percent vis-à-vis the dollar, though it was 0.2

percent weaker on a real effective basis through August. Appreciation has been driven by 

strong domestic economic data as well as safe-haven inflows amid heightened geopolitical 

tensions. Japan has not intervened in the foreign exchange market in almost six years. 

Japan’s current policy mix consists of accommodative monetary policy and supportive 

fiscal policy. 

The Bank of Japan (BOJ) adopted a new policy framework in 2016, which shifted policy 

implementation from targeting monetary base expansion toward “yield curve control,” or 

targeting short-term interest rates as well as 10-year government bond yields. The BOJ 

also adopted an “inflation-overshooting commitment” to further support inflation 

expectations. In order to maintain the target on 10-year yields of “around” zero percent as 

upward pressure on yields increased, the BOJ has three times employed the tool of fixedrate purchase operations, in which the Bank pledged to buy unlimited amounts of Japanese 

Government Bonds within a specified maturity range. 

The Japanese government has been actively employing fiscal policy where available, with 

Prime Minister Abe’s 2016 stimulus package the latest example. The package in terms of 

new fiscal spending was 1.3 percent of GDP, the largest since January 2013. In a sign that 

Abe’s stimulus support is finally impacting the economy, second quarter GDP showed an 

increase in public investment of nearly 3 percent on the year, the largest such increase 

since the second quarter of 2014 before the last consumption tax hike. The IMF projects 

that growth will slow in 2018 due to a smaller expansion in foreign demand, the scheduled 

expiration of fiscal support, and a moderation in consumption growth. The challenge for

the Japanese authorities over the medium term will be to implement necessary fiscal 

consolidation in a manner that minimizes the negative impact on overall growth.

Korea

Korea’s current account surplus declined modestly in 2016, a trend that has continued in 

the first half of 2017. After reaching a peak of 7.8 percent of GDP in 2015, the current 

account surplus declined to 5.3

percent of GDP in the first half of 

2017. The decline was largely 

due to a widening of the services 

trade deficit. Korea’s goods 

trade surplus continued to 

moderate slightly as well, though 

it remains high at 8 percent of 

GDP. The IMF in its most recent 

analysis described Korea’s 

current account surplus as 

stronger than justified by 

-5%

0%

5%

10%

2007200820092010201120122013201420152016

H1 2017

Percent of GDP

Korea: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Korea, Haver
20

medium-term fundamentals. The economy remains overly dependent on exports to 

support growth, given persistently weak domestic demand.

Korea’s goods trade surplus with the United States remains high at $22 billion between July

2016 and June 2017. Although Treasury remains concerned by the large bilateral trade 

imbalance between the United States and Korea, it was $8 billion lower than the same 

period 12 months prior. Given that the United States runs a services surplus with Korea, 

the overall trade and goods and services trade surplus was somewhat lower at $12 billion 

during the same period. 

Through end-September, the 

won has appreciated 5.4 percent 

against the dollar, but it is little 

changed in 2017 on a real 

effective basis. In its most 

recent analysis, the IMF 

maintained its assessment that 

the won is 5-15 percent 

undervalued. 

Korea does not publish its 

foreign exchange market 

intervention. Treasury estimates 

that Korean authorities made net 

purchases of foreign exchange of

$4.9 billion (0.3 percent of GDP), 

including activity in the forward 

market, between July 2016 and 

June 2017. Korea maintains 

ample reserves at $371 billion as 

of June 2017, equal to more than 

three times gross short-term 

external debt and 25 percent of 

GDP. Korea has well-developed 

institutions and markets, and 

should limit currency intervention to only truly exceptional circumstances of disorderly 

market conditions. Korea also maintains sufficient policy space to support domestic 

demand, particularly when public sector debt remains relatively low at around 40 percent 

of GDP. Increased social spending, which remains well below most other OECD economies, 

could be particularly helpful for supporting stronger domestic consumption.

The Euro Area and Germany

The euro area is a currency union in which there has been considerable dispersion across 

members in terms of the quality and strength of economic performance. This dynamic has 

affected the euro exchange rate such that real effective exchange rates in some individual 

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17

Indexed December 2014 = 100

Korea: Exchange Rates

REER NEER KRW/USD

Sources: Bank of Korea, BIS

-10

-5

0

5

10

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Billion U.S. Dollars

Korea: FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Bank of Korea, U.S. Treasury estimates
21

member countries (e.g., Germany) appear to be undervalued relative to economic 

fundamentals. 

The euro has appreciated markedly this year, but remains relatively weak in historical 

terms. Through the end of September, the euro has appreciated in 2017 by 12 percent 

against the dollar and 5.8 percent on a nominal effective basis. Real effective appreciation 

in 2017 has been more modest, at 4.8 percent through end-August. Further, in spite of this 

recent appreciation, the euro remains 4 percent weaker than its historical average in real 

effective terms, and roughly 2 percent weaker on a bilateral basis against the dollar versus 

its historical average. Although persistent weakness in some of the peripheral euro area 

economies contributed to uncertainty about the resilience of the monetary union and 

weakened the euro amidst the European debt crisis, euro area monetary policy has had a 

sizeable influence on the currency since 2014. Easing by the ECB opened a sizable gap in 

bond market yields between the United States and the euro area, which contributed to the 

euro’s weakness versus its historical level. More recently, however, the euro area’s recent 

stronger economic performance and shifts in expectations for the ECB policy outlook have 

contributed to euro appreciation in 2017. 

The combination of lower oil prices, a relatively weak currency, and German economic 

policies supporting high domestic saving and low consumption and investment has led to a 

rapid increase in Germany’s surplus, which is now the largest nominal surplus in the world 

at $270 billion over the four quarters through June 2017. Germany’s real effective 

exchange rate has depreciated by 8 percent since 2009, a shift that is counterintuitive in 

light of Germany’s large and persistent current account surplus but for its membership in 

the monetary union. 

A number of German economic policies have restrained domestic consumption and 

investment, including elevated labor and value-added taxes. Nonetheless, German 

domestic demand has strengthened recently and has driven German growth since mid2015, while the contribution from net exports has been slightly negative over the same

period. Still, demand growth has been insufficient to appreciably reduce Germany’s 

external imbalance, and the IMF projects only a small reduction over the medium term 

under current policies. Demand growth would need to accelerate substantially over a 

sustained period for rebalancing to proceed at a reasonable pace, which would be 

supported by growth-friendly reforms to tax policy. 

Germany’s bilateral trade surplus with the United States is very sizable and a matter of 

concern. Treasury recognizes that Germany does not exercise its own monetary policy and 

that in the absence of stronger growth elsewhere in the currency union, upward pressure 

on the nominal and real effective exchange rates may not be strong. Treasury also 

recognizes that Germany is near full employment. Nevertheless, Germany has a 

responsibility as the fourth-largest economy globally and as an economy with a very large 

external surplus to contribute to more balanced demand growth and to more balanced 

trade flows. Pushing demand against relatively inelastic supply should help push up wages, 

domestic consumption, relative prices against many other euro area members, and demand 
22

for imports; and higher relative prices would help appreciate Germany’s low real effective 

exchange rate. This would contribute to both global and euro area rebalancing. 

Switzerland

Although Switzerland has faced 

persistent pressures from safehaven inflows over the last few 

years, these pressures have 

eased, at least temporarily, 

following the French elections 

and in advance of expected ECB 

policy normalization. At the 

same time, domestic economic 

activity remains weak, and the 

current account surplus remains 

elevated. The current account 

surplus in the first half of 2017 

was 10 percent of GDP, up marginally from 9.9 percent of GDP in 2016. Switzerland’s role 

as an international trading and financial services hub contributes to its large current 

account surplus: For example, the Swiss brokerage industry (which facilitates trade in 

goods) constitutes 3-4 percent of GDP, and accounted for half of Switzerland’s trade 

surplus last year, even though the actual merchandise may not physically pass through 

Switzerland. 

The United States’ goods trade deficit with Switzerland was $6.6 billion in the first half of 

2017, unchanged compared to a year earlier.

Through August 2017, the Swiss franc’s nominal and real effective exchange rates were 

both lower by roughly 2.5 percent. Through the end of September, the Swiss franc 

depreciated 6.3 percent against the euro and appreciated 4.9 percent against the dollar. 

Switzerland continues to rely on monetary policy as its main tool to spur growth and 

inflation, with negative interest 

rates and intervention in the 

foreign exchange market to 

contain appreciation pressure on 

the franc. While Swiss authorities 

do not publish monthly 

intervention data, Treasury 

estimates that Swiss National 

Bank (SNB) net purchases of

foreign exchange (specifically

euros) totaled $58 billion from the 

second half of 2016 through the 

first half of 2017, with most of the 

-10

-5

0

5

10

15

20072008200920102011

20122013201420152016

H1 2017

Percent of GDP

Switzerland: Current Account Balance

Income Services Goods Current Account Balance

Sources: SNB, Haver

-20

-10

0

10

20

30

40

50

60

70

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Billion U.S. Dollars

Switzerland: FX Intervention

Sources: SNB, Haver, U.S. Treasury estimates based on sight deposits 
23

2017 interventions occurring in the first quarter. This suggests a modest decline compared 

to intervention in 2016, according to the SNB’s annual report, of $68 billion. 

As a result of intervention, Switzerland’s stock of foreign reserves has grown to 109

percent of GDP in the first half of this year. The IMF noted in Switzerland’s 2016 Article IV 

consultation that future interventions should primarily be limited to preventing sharp

appreciations from safe-haven inflows, and that interest rates should be used to meet 

longer-term inflation and economic objectives. Treasury supports this recommendation, 

and also encourages the Swiss authorities to publish all intervention data on a higherfrequency basis.
24

Section 2: Intensified Evaluation of Major Trading Partners

Together, the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) and the 

Trade Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”) require the 

Secretary of the Treasury to provide semiannual reports on the foreign exchange policies of 

the major trading partners of the United States. Under Section 3004 of the 1988 Act, the 

Report must consider “whether countries manipulate the rate of exchange between their 

currency and the United States dollar for purposes of preventing effective balance of 

payments adjustment or gaining unfair competitive advantage in international trade.” 

Section 701 of the 2015 Act requires that Treasury undertake an enhanced analysis of 

exchange rates and externally-oriented policies for each major trading partner “that has—

(1) a significant bilateral trade surplus with the United States; (2) a material current 

account surplus; and (3) engaged in persistent one-sided intervention in the foreign 

exchange market.” Additionally, the 2015 Act establishes a process to engage economies 

that may be pursuing unfair practices and impose penalties on economies that fail to adopt 

appropriate policies.12

Key Criteria

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, this 

section of the Report seeks to identify any major trading partner of the United States that 

has: (1) a significant bilateral trade surplus with the United States, (2) a material current 

account surplus, and (3) engaged in persistent one-sided intervention in the foreign 

exchange market. Section 701 requires data on each major trading partner’s bilateral trade 

balance with the United States, its current account balance as a percentage of GDP, the 

three-year change in the current account balance as a percentage of GDP, foreign exchange 

reserves as a percentage of short-term debt, and foreign exchange reserves as a percentage 

of GDP. Data for the most recent four-quarter period (July 2016 to June 2017, unless 

otherwise noted) are provided in Table 1 (on p. 15) and Table 2 (below). 

As noted earlier, Treasury’s focus is on the 12 largest trading partners of the United States; 

these economies account for more than 70 percent of U.S. trade in goods. Additionally, this 

Report covers Switzerland, which is currently the United States’ 14th largest trading 

partner, but has previously been among the 12 largest trading partners and has appeared 

on Treasury’s Monitoring List. No economy below the top 12 trading partners individually 

accounts for more than 1.6 percent of U.S. goods trade. Treasury’s goal is to focus attention 

on the currency practices of those economies whose bilateral trade is most significant to 

the U.S. economy and whose policies are the most material for the global economy.

 12 Because the standards and criteria in the 1988 Act and 2015 Act are distinct, it is possible that an economy 

could be found to meet the standards identified in one of the Acts without being found to have met the 

standards identified in the other. In particular, a finding that an economy met the standards in the 1988 Act 

of manipulating its currency would require Treasury to examine a wider array of additional facts such as 

foreign exchange reserve coverage, monetary policy, or inflation developments.
25

The results of Treasury’s latest assessment pursuant to Section 701 of the 2015 Act are 

discussed below.

Criterion (1) – Significant bilateral trade surplus with the United States:

Column 1 in Table 2 provides the bilateral goods trade balances for the United States’ 12

largest trading partners and Switzerland for the four quarters ending June 2017.13 China 

has the largest trade surplus with the United States by far, after which the size of bilateral 

trade surpluses declines notably. Treasury assesses that economies with a bilateral goods 

surplus of at least $20 billion (roughly 0.1 percent of U.S. GDP) have a “significant” surplus. 

Highlighted in red in column 1 are the seven major trading partners that have a bilateral 

surplus that meets this threshold over the most recent four quarters. 

Criterion (2) – Material current account surplus:

Treasury assesses current account surpluses in excess of 3 percent of GDP to be “material”

for the purposes of enhanced analysis. Highlighted in red in column 2a are the five

economies that had a current account surplus in excess of 3 percent of GDP for the four 

quarters ending June 2017. In the aggregate, these five economies accounted for more than 

half of the value of global current account surpluses as of the end of 2016. Column 2b 

 13 Although this Report does not treat the euro area itself as a major trading partner for the purposes of the 

2015 Act – this Report assesses euro area countries individually – data for the euro area are presented in 

Table 2 and elsewhere in this Report both for comparative and contextual purposes, and because policies of 

the ECB, which holds responsibility for monetary policy for the euro area, will be assessed as the monetary 

authority of individual euro area countries.

Balance

(% of GDP, 

Trailing 4Q)

(2a)

3 Year Change 

in Balance

(% of GDP) 

(2b)

Balance

(USD Bil., 

Trailing 4Q)

(2c)

Purchases

(% of GDP, 

Trailing 4Q)

(3a)

Purchases

(USD Bil., 

Trailing 4Q)

(3b)

Purchases

(USD Bil., 

Trailing 2Q)

(3c)

Purchases

8 of 12 

Months†

(3d)

China 357 1.3 -0.1 155 -2.7 -311 -62 No

Japan 69 3.7 3.5 185 0.0 0 0 No

Mexico 69 -1.7 0.7 -18 -0.2 -2 -2 No

Germany 63 7.7 0.7 268 - - - -

Italy 29 2.8 1.4 51 - - - -

India 23 -1.3 -0.3 -30 1.8 42 30 Yes

Korea 22 5.7 -0.3 84 0.3 5 9 Yes

Canada 19 -2.9 -0.2 -45 0.0 0 0 No

France 14 -1.0 0.3 -26 - - - -

Taiwan 14 12.7 1.5 70 0.9 5 3 Yes

Switzerland 13 10.3 1.3 69 8.7 58 30 Yes

United Kingdom -1 -5.1 0.4 -129 0.0 0 0 No

Brazil -5 -0.7 2.9 -13 2.3 46 5 Yes

Memo : Euro Area 126 3.0 0.8 357 0.0 0 0 No

Table 2: Major Foreign Trading Partners Evaluation Criteria

Bilateral Goods 

Surplus with United 

States (USD Bil., 

Trailing 4Q) 

(1)

†In assessing the persistence of intervention, Treasury will consider an economy that is judged to have purchased foreign exchange on net for 8 of the 12 

months to have met the threshold.

Sources: Haver, National authorities, U.S. Census Bureau, and U.S. Department of the Treasury staff estimates

Current Account Net Foreign Exchange Intervention
26

shows the change in the current account surplus as a share of GDP over the last three years, 

although this is not a criterion for enhanced analysis. 

 

Criterion (3) – Persistent, one-sided intervention: 

Treasury assesses net purchases of foreign currency, conducted repeatedly, totaling in 

excess of 2 percent of an economy’s GDP over a period of 12 months to be persistent, onesided intervention.14 Columns 3a and 3d in Table 2 provide Treasury’s assessment of this 

criterion.15 In economies where foreign exchange interventions are not published, 

Treasury uses estimates of net purchases of foreign currency to proxy for intervention. 

Switzerland and Brazil meet this criterion for the four quarters ending June 2017, per 

Treasury estimates. India is very close to meeting this criterion for the four quarters 

ending June 2017, with net purchases of foreign currency slightly below 2 percent of GDP.

Summary of Findings

Pursuant to the 2015 Act,16 Treasury finds that no major trading partner of the United 

States met all three criteria in the current reporting period. Four major trading partners of 

the United States, however, met two of the three criteria for enhanced analysis in this 

Report. Additionally, one major trading partner, China, constitutes a disproportionate 

share of the overall U.S. trade deficit. These five economies – China, Japan, Korea, 

Germany, and Switzerland – constitute Treasury’s Monitoring List. Japan, Germany, 

and Korea have met two of the three criteria in every Report since the April 2016 Report, 

having material current account surpluses combined with significant bilateral trade 

surpluses with the United States. Switzerland has met two of the three criteria in every 

Report since the October 2016 Report, having a material current account surplus and 

having engaged in persistent, one-sided intervention in foreign exchange markets. China 

has met one of the three criteria in every Report since the October 2016 Report, having a 

significant bilateral trade surplus with the United States, with this surplus accounting for a 

disproportionate share of the overall U.S. trade deficit. Treasury will closely monitor 

and assess the economic trends and foreign exchange policies of each of these 

economies.

 14 Notably, this quantitative threshold is sufficient to meet the criterion. Other patterns of intervention, with 

lesser amounts or less frequent interventions, might also meet the criterion depending on the circumstances 

of the intervention. 

15 Treasury used publicly available data for intervention on foreign asset purchases by authorities, or 

estimated intervention based on valuation-adjusted foreign exchange reserves. This methodology requires 

assumptions about both the currency and asset composition of reserves in order to isolate returns on assets 

held in reserves and currency valuation moves from actual purchases and sales, including estimations of 

transactions in foreign exchange derivatives markets. Treasury also used alternative data series when they 

provide a more accurate picture of foreign exchange balances, such as China’s monthly reporting of net 

foreign assets on the PBOC’s balance sheet and Taiwan’s reporting of net foreign assets at its central bank. To 

the extent the assumptions made do not reflect the true composition of reserves, estimates may overstate or 

understate intervention. Treasury strongly encourages those economies in this Report that do not currently 

release data on foreign exchange intervention to do so.

16 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
27

Taiwan has been removed from the Monitoring List in this Report. Taiwan met two of the 

three criteria in the October 2016 Report, having a material current account surplus and 

having engaged in persistent, one-sided intervention in foreign exchange markets, but met 

only one of the three criteria, a material current account surplus, in both the April 2017 

Report and this Report. 

Regarding the 2015 Act, while no economy met all three of the criteria for the current 

reporting period, Treasury remains deeply concerned by the significant imbalances in the 

global economy. Bilateral trade imbalances with many of our major trading partners have 

grown to very large levels. More broadly, current account surpluses in several major 

trading partners have not only been large but unusually persistent over the last decade. 

This global configuration of external positions is untenable. The United States should not

and will not bear the burden of an international trading system that unfairly disadvantages 

our exports and unfairly advantages the exports of our trading partners, whether through 

imbalanced macroeconomic policies or unfair trade barriers. It is critical that our major 

trading partners durably avoid foreign exchange and macroeconomic policies that facilitate 

unfair competitive advantage. Treasury is committed to aggressively and vigilantly 

monitoring and combatting unfair currency practices. Treasury will also vigorously pursue 

an agenda to facilitate more balanced global growth and a reduction in global imbalances in 

the G-20 and other fora.

Based on the analysis in this Report, Treasury has also concluded that no major trading 

partner of the United States met the standard in the 1988 Act of manipulating the rate of 

exchange between its currency and the United States dollar for purposes of preventing 

effective balance of payments adjustments or gaining unfair competitive advantage in 

international trade during the period covered in the Report. 

 
28

Annex I: Foreign Exchange Reserves – Recent Developments and 

Adequacy Measures17

Global foreign currency reserves resumed a multi-decade climb in the years following the 

2008 global financial crisis, reaching a historic peak of over $12 trillion in mid-2014.18 

Since mid-2014, however, the global stock of foreign currency reserves has declined, falling 

back to around $11.1 trillion as of June 2017. The decline in global reserves over the last 

three years has largely been due to developments in China, which sold foreign exchange to 

stem capital outflow pressures and arrest depreciation pressure of the renminbi; and in oil 

exporters, which have used reserves to cushion the external shock from lower oil prices. 

Excluding China and several large oil exporters, global foreign exchange reserves have in 

fact been broadly stable over the last three years, though country-level trends vary. 

This annex examines recent developments in the reserve holdings of the 13 major U.S. 

trading partners discussed in this Report, which together account for almost two-thirds of 

global foreign currency reserves. Further, the annex evaluates reserve adequacy for these 

economies against several standard benchmarks. All of the emerging market economies 

that are major U.S. trading partners have more than sufficient reserves when measured 

against these benchmarks, and many currently have stocks of foreign currency reserves 

that are at or near all-time highs. Excessive reserve accumulation imposes costs both on 

the reserve accumulator and the global economy, heightening the importance of building 

resilience through stronger policy frameworks rather than continued reserve 

accumulation. 

Recent Trends in Reserve Holdings

The 13 major U.S. trading 

partners discussed in this Report 

account for 63 percent of global 

foreign currency reserves, as 

shown in Figure 1; China alone 

accounts for 28 percent. China is 

the only major U.S. trading 

partner whose reserves have 

declined substantially over the 

last three years. China’s foreign 

currency reserves fell from a 

peak of close to $4 trillion in 

mid-2014 to around $3 trillion in 

early 2017, and have been broadly stable since. The net decline in China’s reserves through 

June ($910 billion, or a 23 percent reduction) accounts for nearly 90 percent of the global 

fall in foreign currency reserves witnessed over the last three years. 

 17 This annex was prepared by Alexandra Altman and Daniel Hall. 18 Changes in reserves are not adjusted for valuation effects. 

0%

4%

8%

12%

16%

Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10Jan-12Jan-14Jan-16

Percent of World GDP

Rest of World

FX Report Economies ex-China

China

Source: International Monetary Fund

Figure 1: Global Foreign Exchange Reserves
29

Excluding China, reserves for the other 12 economies covered in the Report grew roughly 

10 percent between mid-2014 and early-2017, as the value of reserve holdings grew in 9 of 

the 12 economies. Over the three-year window, Switzerland was the only major U.S. 

trading partner to rapidly accumulate reserves. Between mid-2014 and mid-2017, 

Switzerland’s reserves rose by close to $230 billion (roughly 45 percent) as the Swiss 

National Bank purchased foreign currencies (primarily the euro) to limit appreciation 

pressures and combat deflationary forces. In Korea, India, and Taiwan, foreign exchange 

reserves grew steadily, and currently are at or near all-time highs for all three economies. 

For the rest of the world, foreign currency reserves declined by $410 billion between mid2014 and mid-2017. This primarily reflected a fall in reserves among oil exporters, 

particularly those with less flexible exchange rate regimes.

Reserve Adequacy

There is no single, commonly accepted standard for assessing reserve adequacy, and 

unique economic and political factors may need to be considered as part of reserve 

adequacy analysis. Traditional benchmarks for reserve adequacy have attempted to 

estimate the scale of funding a country might need to respond to shocks to the current and 

capital accounts by comparing reserves to levels of import demand or short-term external 

debt. Common standards for these metrics – three to six months of imports and one year of 

short-term external debt19 – were based on general concepts rather than historical 

experiences, such that the proposed adequacy levels were not correlated with actual 

reserve needs in past capital or current account crises. Moreover, these traditional metrics 

focus only on narrow risk exposures, and will often imply materially different levels of 

reserves adequacy. 

More recently there have been attempts to use model-based approaches to evaluate 

reserve adequacy, including efforts to estimate reserve demand or compare the relative

costs and benefits of reserve accumulation. While such models have been an active area of 

research, they tended to be highly sensitive to underlying assumptions, which limits their 

practical utility as a guide to the appropriate level of reserves.20 

The IMF in 2011 introduced a new adequacy metric for emerging market economies to 

build on the simplicity of traditional metrics while incorporating insights from historical 

experience.21 The IMF metric is a weighted combination of four elements that reflect 

 19 The Greenspan-Guidotti short-term debt rule suggests an economy’s reserves should be measured against 

all of the government’s foreign assets and all sovereign liabilities denominated in, or indexed to, foreign 

currencies, as well as foreign currency assets and liabilities of financial intermediaries that have access to the 

safety net (e.g. banks). Greenspan, Alan. “Remarks by Chairman Alan Greenspan Before the World Bank 

Conference on Recent Trends in Reserves Management,” 29 April 1999, Washington D.C. 20 See, for example, Sebastian Edwards, Sebastian (1985). “On the Interest-Rate Elasticity of the Demand for 

International Reserves: Some Evidence from Developing Countries,” Journal of International Money and 

Finance 4 (June), pp. 287-95; and Jeanne, Olivier and Romain Rancière (2006). “The Optimal Level of Reserves 

for Emerging Markets: Formulas and Applications,” IMF Working Paper No. 06/229.

21 International Monetary Fund (2011). “Assessing Reserve Adequacy,” IMF Policy Paper, February. 
30

several sources of external funding risk based on past balance of payments crises: export 

earnings (to capture risk of external demand collapse); broad money (to represent 

domestic assets that could be shifted abroad); short-term debt; and medium- and longterm debt and equity liabilities (to reflect flight risk of portfolio and bank flows). Observed 

outflows in past balance of payments crises are used to model the relative risk levels of 

these potential sources of pressures, as well the appropriate coverage ratio for each 

component. The metric is calibrated to the type of exchange rate regime (fixed or floating) 

as well as the existence of capital controls. The IMF’s current metric for fixed and floating 

exchange rate regimes is calculated as:

Fixed FX Regime 

Suggested Reserves = 10% x Exports + 10% x Broad Money + 30% x Short-term debt + 20% Other Liabilities

Floating FX Regime 

Suggested Reserves = 5% x Exports + 5% x Broad Money + 30% x Short-term debt + 15% Other Liabilities22

Given remaining uncertainties in estimating the appropriate level of reserves, the IMF 

conservatively suggests reserves are sufficient when they fall within 100 to 150 percent of 

the metric. 

Table 1 compares reserve levels in each of the 13 major U.S. trading partners covered in 

this Report to three benchmarks: import coverage, short-term external debt, and the IMF’s 

adequacy metric. As discussed in prior versions of this Report, emerging market 

economies over the last decade have consistently held reserves in excess of common 

adequacy benchmarks.23 It is unsurprising, therefore, that economies that have built 

reserves in recent years (Brazil, India, Korea, Taiwan) remain comfortably above these 

levels. More interesting is that despite the dramatic recent decline, China’s reserves also 

remain more than sufficient compared to these benchmarks. The IMF’s adequacy metric, 

by contrast, does not gauge China’s reserves to be as excessive as the traditional metrics. 

This is largely due to the outsized influence of the broad money component, which alone 

accounts for over 60 percent of China’s recommended reserve level under the IMF 

adequacy metric. By comparison, the broad money component accounts for closer to 40 

percent, on average, of the suggested level of reserves among other emerging market

economies in Table 1. 

While foreign currency reserves serve a useful role in both preventing crises and mitigating 

their impact, excessive reserve accumulation also imposes costs on the accumulating 

economy and on the rest of the world. Domestically, these costs include the opportunity 

costs of foregone government expenditures, as well as the explicit costs of sterilizing 

 22 The analogous capital-control adjusted metrics are the following:

Fixed FX Regime = 10% x Exports + 5% x Broad Money + 30% x Short-term debt + 20% Other Liabilities

Floating FX Regime = 5% x Exports + 2.5% x Broad Money + 30% x Short-term debt + 15% x Other Liabilities 23 “Annex: Foreign Exchange Reserve Accumulation Recent Developments and Adequacy,” Report to Congress 

on International Economic and Exchange Rate Policies (July 2010); “Appendix III: The Adequacy of Foreign 

Exchange Reserves,” Report to Congress on International Economic and Exchange Rate Policies (December 

2006). 
31

reserve accumulation.24 Externally, an economy’s excessive reserve accumulation can 

generate negative spillover effects for the rest of the world, by facilitating unfair 

competitive advantage for the accumulating economy and creating balance of payment 

pressures on other economies. 

Rather than relying solely on reserves, the IMF recommends that countries enhance their 

resilience by strengthening their policy frameworks. In particular, the IMF highlights 

several priorities for enhancing resilience to external shocks: sound macroeconomic and 

prudential policy frameworks; low and sustainable levels of public debt; monetary and 

exchange rate policies that maintain low inflation; and effective supervision that limits 

contingent risks from financial sector. Moreover, other reserve-like resources, including 

credit lines from international financial institutions, swap lines, or sovereign wealth fund 

assets, can also complement traditional reserves by providing a safety net to buffer 

external shocks. Many of the economies in this Report have in fact strengthened their 

macroeconomic and prudential policy frameworks in the post-crisis period, but have 

concurrently continued to build reserves. With reserves at sufficient – or more than

sufficient – levels among most major U.S. trading partners, robust macroeconomic policy 

frameworks should be the first line of defense against external shocks, rather than 

continued reserve accumulation.

 24 For a fuller discussion of domestic costs of reserves accumulation, see Green, Russell and Tom Torgerson 

(2006). “Are High Foreign Exchange Reserves in Emerging Markets a Blessing or a Burden?” Department of 

the Treasury, Office of International Affairs, Occasional Paper No. 6, March 2007. 

Import 

Coverage1 

(Months)

Reserves/ 

ShortTerm 

External 

Debt2

IMF 

Metric3

Short-Term 

Debt 

(100%)

IMF Metric 

(100%)

China 3057 27% 20 597% 171%4 2100 2500 1300

Japan 1189 24% 18 142% .. 790 350 ..

Switzerland 725 109% 23 222% .. 540 400 ..

Taiwan 442 80% 17 516% .. 290 360 ..

Korea 371 25% 8 273% 121% 110 240 60

Brazil 369 18% 25 349% 181% 280 260 170

India 362 16% 7 368% 150% 70 260 120

Mexico 166 16% 5 300% 106% .. 110 10

U.K. 117 5% 2 8% .. .. .. ..

Canada 75 5% 2 23% .. .. .. ..

France 38 2% 1 4% .. .. .. ..

Germany 38 1% 0 5% .. .. .. ..

Italy 37 2% 1 16% .. .. .. ..

1 Goods and service imports. IMF data as of March 2017.

3 The IMF does not provide reserves for advanced economies or Taiwan. IMF metric as of April 2017.

4 China's reserves are compared to the IMF's capital control-adjusted metric.

2 Sum of International Debt Securities and Consolidated Liabilities to BIS Reporting Banks with less than one year remaining 

maturity. Sourced from the Joint External Debt Hub. 

Table 1: Measures of Reserve Adequacy

Reserves in Excess of Metric (US$ Bn)

Reserves 

(US$ Bn)

Reserves/ 

GDP

Reserves Adequacy Metrics

Import 

Coverage

(6 Months)
32

Glossary of Key Terms in the Report

Exchange Rate – The price at which one currency can be exchanged for another. Also 

referred to as the bilateral exchange rate.

Exchange Rate Regime –The manner or rules under which an economy manages the 

exchange rate of its currency, particularly the extent to which it intervenes in the foreign 

exchange market. Exchange rate regimes range from floating to pegged.

Floating (Flexible) Exchange Rate – An exchange rate regime under which the foreign 

exchange rate of a currency is fully determined by the market with intervention from the 

government or central bank being used sparingly.

Foreign Exchange Reserves – Foreign assets held by the central bank that can be used to 

finance the balance of payments and for intervention in the exchange market. Foreign 

assets consist of gold, Special Drawing Rights (SDRs), and foreign currency (most of which

is held in short-term government securities). The latter are used for intervention in the 

foreign exchange markets.

Intervention – The purchase or sale of an economy’s currency in the foreign exchange 

market by a government entity (typically a central bank) in order to influence its exchange 

rate. Purchases involve the exchange of an economy’s own currency for a foreign currency, 

increasing its foreign currency reserves. Sales involve the exchange of an economy’s

foreign currency reserves for its own currency, reducing foreign currency reserves. 

Interventions may be sterilized or unsterilized.

Nominal Effective Exchange Rate (NEER) – A measure of the overall value of an 

economy’s currency relative to a set of other currencies. The effective exchange rate is an 

index calculated as a weighted average of bilateral exchange rates. The weight given to 

each economy’s currency in the index typically reflects the amount of trade with that 

economy. 

Pegged (Fixed) Exchange Rate – An exchange rate regime under which an economy

maintains a set rate of exchange between its currency and another currency or a basket of 

currencies. Often the exchange rate is allowed to move within a narrow predetermined 

(although not always announced) band. Pegs are maintained through a variety of 

measures, including capital controls and intervention. 

Real Effective Exchange Rate (REER) – A weighted average of bilateral exchange rates, 

expressed in price-adjusted terms. Unlike the nominal effective exchange rate, it is further 

adjusted for the effects of inflation in the countries concerned. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.