The U.S. declined to brand China a currency manipulator, while asking the world’s second-largest economy to strengthen the “significantly undervalued” yuan.
In its semi-annual report to Congress on exchange-rate policies, the Treasury Department said yesterday that it will continue to “closely monitor” the pace of yuan appreciation and push for “policy changes that yield greater exchange-rate flexibility.”
The Obama administration says China’s policies keep the yuan undervalued and produce an unfair advantage in global trade. Politicians including presumptive Republican presidential nominee Romney and Senator Charles Schumer, a New York Democrat, have complained that the administration should be more aggressive in pushing China on the currency. No country has been designated a manipulator by the U.S. since China in 1994.
“With recession in Europe starting to slow China’s economy, now is not the time to rock the boat with one of America’s most important trading partners,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an e-mail after the report was released.
“Greater foreign-exchange rate flexibility and the need to monitor are going to be in this report for the next several years, but the nuclear option to declare China an outright manipulator is unlikely to be used with the global outlook so uncertain right now,” Rupkey said.
In its report, the Treasury said the deepening European crisis “is a significant risk to the U.S. outlook as our recovery remains vulnerable to events abroad.” A “tightening” of the region’s financial markets could “adversely impact the willingness of U.S. banks to lend and invest.”
The Treasury said the Chinese yuan has appreciated 40 percent against the dollar, after taking inflation into account, since China initiated currency reform in July 2005. This year through May 15 the Chinese currency was “virtually flat” against the dollar.
“It is in China’s interest to allow the exchange rate to continue to appreciate, both against the dollar and against the currencies of its other major trading partners,” the Treasury said in the report, which was originally due to be released April 15.
The Treasury frequently delays the report. The last one, due Oct. 15, was released Dec. 27. The previous one, due April 15, 2011, was released May 27.
Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said the report was overly critical of China.
“Treasury is making a mistake in not giving China more credit for the appreciation that it has undertaken and the large reduction in its global external imbalance,” Lardy said in an e-mail. “They should not stick with the ‘significantly undervalued’ language.”
The Treasury is required to report twice a year on exchange-rate policies of major trading partners and enter into direct talks with those it designates as manipulators.
China’s economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed earlier this month, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes. China’s gross domestic product expansion, which dropped to 8.1 percent in the first quarter, may further slip to 7.9 percent in the three months ending in June, according the survey. That would be the sixth quarterly deceleration.
The International Monetary Fund last month projected that China would grow 8.2 percent this year and the global economy will expand by 3.5 percent.
The yuan dropped for a third week on signs China’s economy is slowing and as concern that Europe’s debt crisis is worsening hurt demand for riskier assets. The yuan fell 0.24 percent this week to 6.3439 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency was little changed yesterday and touched 6.3525, the weakest level since Dec. 20. It has declined 0.53 percent in May, heading for its worst month in at least five years.
The Chinese currency is “getting closer to an equilibrium price,” said Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institution in Washington. “The U.S. Treasury recognizes that, although politically you would not be able to say it officially. So they say that the Chinese need to go further. They do need to go a little further.”