Several countries, including China and Singapore, have consistently been on the US watchlist for manipulating their currencies. This has been a bone of contention with disputes erupting every now and then. Both China and Singapore are 'managed float' regimes that require the central banks to intervene in the foreign exchange market to keep the rates within a certain band. Whether such intervention is currency manipulation rests on intention which is a thin line that is hard to prove or defend. When it is policy driven to keep rates low and thereby exports more competitive, trading partners are understandably displeased. Are China and Singapore guilty of currency manipulation? There are some quantitative tell-tale signs and you can be the judge.
The Balance of Payments (BOP) is a sort of double-entry presentation of a country's monetary relationship with the rest of the world over a stated time period. It records the inflows and outflows of funds of a country. A BOP is divided into 2 parts, a Current Account and a Capital Account. The Current Account records trade in goods and services, interest on loans, private transfers. If a country has more inflows on a net basis, it has a surplus Current Account. More net outflows means it has a deficit Current Account. The Capital account records inflows and outflows on capital and financial transactions, which includes borrowings/lendings, FDI. etc. The Capital Account should balance off the Current Account and the BOP nets to zero. One simple example to make this clear -- if a country imports more than it exports, it has a deficit Current Account. It pays for this with a loan which is recorded as an inflow in the Capital Account, thus the BOP = zero.
In reality, the BOP do not balance off with precision. If the Current Account and Capital Account does not match off, the difference is found in the books of the Central bank. It is represented in the movement in the forex reserves. Thus within the Capital Account is included a sub-account called the Reserve Account to record the net inflows and outflows of reserves. In other words, the central bank's market intervention mops up the difference in inflows and outflows of funds.
To round up the BOP, note that there is always a discrepancy figure. This is due to inaccuracies in the data collection.
The countries with surplus Current Accounts almost always tend to have pressures to appreciate their currencies. These countries are doing well, exporting more than importing. Thus there are more demand by trading partners to buy their currencies to pay for the goods and services. With high demand, their exchange rates go up. In a pure floating rate regime, market supply and demand forces will re-align exchange rates to a new equilibrium.
Let's take a look at the Current Accounts of China and Singapore :
Both China and Singapore have been running Current Account surpluses for decades. Have the CNY and SGD appreciated to the level the market suggests? According to trading partners, especially the US (because they have an agency that monitors such economic numbers) both the currencies are under-valued. The question arises whether China and Singapore are manipulating the home currencies.
Here's a peek at the balance sheet of the MAS
MAS foreign exchange holdings have increased relentlessly over the years. Singapore is a managed floating rate regime. It manages daily volatility within a band. When the rate is hitting the upper threshold, MAS intervenes in the forex market to buy foreign currencies and sell SGD thus forcing the rate down. If the rate falls to the lower threshold, MAS does the reverse in buying SGD to support the domestic currency. Singapore's persistent Current Account surplus resulted in upward
pressure on the rates. To keep the rate down, MAS has to enter the market often to buy up foreign currencies. MAS balance sheet shows the upward trajectory of forex reserves consistent with the Current Account surplus chart.
How does MAS fund the forex purchases? We turn to the liabilities side of the balance sheet. First of course, is it's equity (Paid up capital and reserves). Secondly, by printing money. Thirdly is the use of government's deposit.
When MAS purchases foreign currencies, it can pay for it by simply crediting the counterparty bank's reserve account. This is referred to as 'printing' money out of nowhere. The downside is inflation due to increased money supply. So to combat inflationary outcomes, MAS forex intervention by money printing is always on a sterilised basis. This means it then issues MAS Bills to soak back the liquidity from the market. The chart shows MAS bill mechanism was only introduced in 2011 which snowballed to a massive S$161b by 31 Mar 2021.
The use of Government deposit is ingenious. You get to understand this here because no where has this ever been written about. MAS is banker to the government. Now the government deposits its revenue which are needed to meet expenditure. But there is something uniquely Singapore. The government collects vast sums of S$ which by law, it cannot spend. These are proceeds from land sales and debt in the form of government securities (for the national pension fund CPF and issues for yield curve discovery). These funds are deposited into its account with MAS pending transfer to the sovereign wealth fund GIC, for investing. MAS makes use of these funds to pay for foreign currencies it purchases in its market intervention. The foreign currencies purchased are transferred to GIC from time to time. It seems to be the only modus operandi for market intervention before 2011. This means 2 things. (1) The domestic savings (proceeds of government securities) and investments (land sales) are recycled back into the economy by MAS. (2) By eventually transferring the foreign currencies to GIC, the evidence is wiped off the books of MAS. It stands to reason the forex reserves are actually much higher, rendered opaque by the transfers to GIC.
However, the high level of forex reserves alone does not indicate the accumulation was for the purpose of suppressing the exchange rate. Every country maintains a certain level of official forex reserves that will cover several months of their import needs. IMF recommends 5-6 months of reserves. Thus as import needs grow, the level of forex reserves grows. Another way to look at it is the ratio of forex reserves to the GDP. If GDP grows, forex reserves has to be increased. Singapore GDP grew from US$96b in 2000 to more than US$400b today. A higher level of forex reserves is required. The MAS has indicated a forex level of about 65% to 75% of GDP is a safe level.
Central bank data on its market intervention may also provide a clue. If the intervention is predominantly one way, ie buying foreign currencies, it indicates manipulation. This could perhaps be the reason why MAS has never reported this data until April 2020, probably an appeasement uder pressure by external demands for transparency. This report shows the market intervention was predominantly one way:
- 1 Jul 2019 to 31 Dec 2019 - net purchase of foreign currency of US$29.9 billion.
- 1 Jan 2020 to 30 Jun 2020 - net purchase of foreign currency of US$44.4 billion
- 1 Jul 2020 to 31 Dec 2020 - net purchase of foreign currency of US$52.1 billion
- 1 Jan 2021 to 30 Jun 2021 - net purchase of foreign currency of US$22.4 billion
- 1 Jul 2021 to 31 Dec 2021 - net purchase of foreign currency of US$ 6.6 billion
The new legislation MAS Amendment ACT, allows an easier mechanism for the central bank to transfer official reserves to GIC by simply subscribing for a new foreign currency-denominated non-market government security RMGS (Reserves Management Govt Security). Some US$55b in the first half of this year has been transferred to the government in exchange for RMGS. By this creative accounting, forex reserves in MAS balance sheet immediately decreased. It dropped from S$579b in Feb 2022 to S$504b by Jun 2022. This is reflected in the reserves to GDP ratio chart showing a significant dip on the right. Is this designed to mislead by showing a lower level of foreign reserves in the balance sheet?
Trading partners are displeased when a country with a booming economy manipulates to prevent its currency to appreciate, thus keeping their exports cheap. Is Singapore guilty of unfair trade practice to maintain export competitiveness? Such unfair practice often ends up with trading partners sitting down for a trade negotiation, and at worst, a tariff war may ensue.
In addition to irate trading partners, there are other consequence for the suppression of exchange rates. Imagine MAS pressing down the lid of a pot of boiling water. At some point, MAS has to lift the lid or risk an explosion from the built-up pressure. By suppressing the rates, MAS is undervaluing the SGD. This means we are paying more for imports, in other words, we are importing foreign inflation. Thus the policy of suppressing rates is inequitable. It benefits the business class with export competitiveness but subjects residents to higher local prices. Just like the pressure building in the boiling pot, there will be a point when inflationary pressure will force MAS to take the lid off and allow the rates to rise and SGD to appreciate.
(Part II focuses on China. Check out here).
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