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S&P: US-China trade deal likely to involve currency provisions

Any U.S.-China trade deal is likely to involve currency provisions, which China would be willing be agree to as long as a currency agreement follows the Trans-Pacific Partnership template, S&P Global Ratings said in a report.

The U.S. has included varying currency provisions in some of its trade deals, including the bilateral Korea-U.S. deal and the U.S.-Mexico-Canada Agreement. China will likely agree to that template as it would not require a substantial change in Chinese policies, according to the rating agency.

However, any currency agreement would include an understanding that China could intervene to support the yuan should it come under substantial downward pressure, Asia-Pacific Chief Economist Shaun Roache said.

The U.S. Treasury labeled China a currency manipulator, which means currency policies could be made part of a trade deal, Roache said.

The U.S. was said to be considering reviving a currency agreement with China as part of an interim trade deal, Bloomberg News reported Oct. 10.

Recent currency provisions are in contrast with the Plaza Accord of 1985 when G-7 countries agreed to substantially depreciate the U.S. dollar to address the rapidly increasing U.S. trade deficit. The accord led to coordinated foreign exchange market intervention that resulted in a near 25% fall in the dollar's real trade-weighted value.

Instead, recent deals call for less intervention and higher dependence on market forces to determine exchange rates.

The U.S. and China are in talks regarding a partial deal, but they seem to have made little to no progress on the structural issues at the center of their dispute. This suggests a comprehensive solution is some way off, Roache added.