The U.S. said it will keep pressing China to strengthen a “significantly undervalued” yuan while declining to brand the world’s second-largest economy a currency manipulator.
In its semi-annual report to Congress on exchange-rate policies, the Treasury Department said today 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 Mitt 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.
The Treasury said also 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.”
On Japan, the world’s No. 3 economy, the Treasury called on the nation to “take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, by easing regulations that unduly deter competition.”
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 scheduled 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.
Romney has promised to go after China more aggressively than President Barack Obama has.
“If I’m president, I will label China a currency manipulator and apply tariffs” wherever needed “to stop them from unfair trade practices,” the former Massachusetts governor said during a March campaign rally in Cleveland.
Treasury Secretary Timothy F. Geithner, in an April 25 interview with CNBC, criticized Romney’s position, saying, “Like you can solve problems in the world, a very complicated world we live in, by calling people names.”
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 administration’s relationship with China is yielding “tangible, significant gains that will benefit the U.S.,” Lael Brainard, the Treasury’s undersecretary for international affairs, said May 16.
Brainard said agreements at talks in Beijing on May 3-4 included a pledge by China to reduce tariffs on consumer goods imports by the end of the year.
China’s decision last month to widen the yuan’s trading band will help “promote rebalancing and financial reform” if it’s “implemented in a way that enables the exchange rate to reflect fully market forces,” Brainard said.
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.