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U.S. Calls China’s Progress on Currency Gains ‘Insufficient’

Hu Jintao, China's president
Hu Jintao, China's president. Photographer: Joshua Roberts/Bloomberg

The U.S. declined to brand China a currency manipulator while saying its No. 2 trading partner has made “insufficient” progress on allowing the yuan to rise.

China should follow through on President Hu Jintao’s commitments to allow more exchange-rate flexibility and boost domestic demand, the Treasury Department said in a report to Congress yesterday on foreign-exchange markets.

The yuan “remains substantially undervalued,” according to the report, which was originally due in October and says no major trading partner meets the legal standard of improperly manipulating its currency. “It is in China’s interest to allow the nominal exchange rate to appreciate more rapidly.”

The Obama administration and U.S. lawmakers say China’s currency policy gives the nation’s exporters an unfair competitive advantage. U.S. concerns have grown as China’s rising economic power put the economic relationship off balance. China had a $252 billion trade surplus with the U.S. in the first 11 months of 2010, according to Commerce Department data.

“The Treasury will continue to closely monitor” the pace of appreciation, the department said in a statement.

Senator Charles Schumer, Democrat from New York, said Congress needs to take bolder action. “It’s as plain as the nose on your face that China manipulates its currency,” he said after the report was released. “It’s just as plain that the only way to address this problem is for Congress to act.”

The yuan climbed 0.17 percent to 6.5920 per dollar as of 10:15 a.m. on Feb. 1 in Shanghai, according to the China Foreign Exchange Trade System. That was the biggest jump since Jan. 14. Financial markets in China, Taiwan and South Korea were shut most of this past week for the Chinese New Year holidays.

Having Its Cake

“Treasury gets to have its cake and eat it too,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “They can call China’s currency undervalued and say it is in its interest for it to appreciate, and yet avoid being overly critical by naming China a manipulator which could hurt relations with a very important trading partner.”

Senator Sherrod Brown, an Ohio Democrat who has been among the lawmakers pushing for a tougher U.S. stance on the yuan, said the currency’s progress is “inadequate.” Senator Max Baucus criticized the “failure” of Treasury to label China a manipulator. Both senators called for Congress to act this year.

Geithner Comments

Treasury Secretary Timothy F. Geithner said last month that China needs to strengthen the “substantially undervalued” yuan because it puts other countries at a competitive disadvantage. The report uses the same phrase to describe the currency and describes an “essentially unchanged level of China’s real effective exchange rate” in global terms that puts pressure on other emerging market economies.

As of Jan. 27, the yuan had appreciated 3.7 percent against the dollar, or at an annual rate of about 6 percent in nominal terms, the Treasury said in the report. The currency has been appreciating more rapidly after taking into account China’s higher inflation rate, the report said.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, said China’s external current account surplus has been declining in a way that could mean “it gets harder to argue that they need to accelerate the pace” of yuan appreciation. China’s current account surplus was 5.2 percent of its gross domestic product last year.

The Treasury described a “multispeed” global recovery in which emerging market nations grew faster than advanced economies. Commodity prices posted a “steady rise,” while sovereign debt concerns led to rising interest rates in some European economies.

‘Rigid’ Exchange Rates

China isn’t the only nation that needs to allow more currency flexibility, the Treasury said. Some countries have put capital controls in place to maintain “rigid” exchange rates, pushing capital to other, more flexible economies and “leading in some cases to overvalued exchange rates,” the report said.

It cited South Korea in particular as a country that should reduce its exchange-rate controls.

“Given the strength of the Korean recovery, rebuilding of reserves, and the rebound of the current account surplus, there is room for a greater degree of exchange rate flexibility and less intervention,” the report said.

The report includes data and developments through January 2011 and it officially covers international economic and foreign exchange developments in 2010. The Treasury’s next report is due in mid-April.

Twice Yearly Report

Under a 1988 law, the Treasury is required to report to Congress twice a year on international economic conditions and exchange-rate policies. The Treasury is required to enter direct talks with a country deemed to be manipulating its currency, and also seek redress through the International Monetary Fund. The last country labeled a manipulator was China, in 1994.

The U.S. has also been pressing for China to open its markets through other policy changes. The Obama administration said in December that China has failed to implement “important commitments” under its obligations to the World Trade Organization.

China is using “excessive, trade-distorting government intervention” to the disadvantage of American companies, the U.S. Trade Representative’s office said Dec. 23 in its annual report on China’s compliance with WTO rules.

In September, the U.S. filed a WTO complaint against China concerning curbs on payment-processing companies such as MasterCard Inc. and Visa Inc. that are at a disadvantage because China favors a monopoly provider, China UnionPay Data Co., according to the U.S. trade office.

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