Treasury: China Not Undervaluing Yuan Deliberately

WASHINGTON -- The U.S. Treasury Department Wednesday labeled China's currency "undervalued" and pledged to keep pushing for it to appreciate but said Beijing was not manipulating its currency for trade gains.

The widely anticipated finding, in a semiannual report to Congress on exchange-rate policies of key trade partners, was certain to be a red flag for U.S. lawmakers who have lined up to present legislation aimed at confronting China more directly on its currency practices.

"Treasury was unable to determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade," the department said.

The finding was unsurprising in view of Treasury Secretary Henry Paulson's contention, repeated Tuesday, that persuasion is more likely than legislation to get Beijing to alter its policy.

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But with U.S. lawmakers and manufacturers claiming China's yuan is undervalued as much as 40 percent and so damages U.S. companies, Treasury sharpened its rhetoric in calling for it to appreciate.

"Treasury forcefully raises the Chinese exchange rate regime with Chinese authorities at every available opportunity and will continue to do so," the report said.

"China should not hesitate any longer to take far more vigorous action to rebalance its economy, promote immediate RMB movement to tackle the currency's undervaluation, and achieve far greater flexibility in the exchange rate regime," it said.

Paulson, in Atlanta on Tuesday, acknowledged that a flood of legislative proposals to pressure China was flowing from the U.S. Senate and said he shared the senator's motives but disagreed with their methods.

"I happen to believe the most effective way to get movement and progress is through direct discussions and negotiations, not through legislation," he told reporters. The Treasury report said China had a responsibility to itself and others to let its currency become more flexible, which would likely mean a rise in its value.

"Heavy foreign exchange market intervention by China's central bank to manage the currency has led to excessive accumulation of foreign exchange reserves and a quick increase in domestic liquidity," the report said, warning that this could lead to inflation and banking problems in China.

"These trends clearly increase the risk of a renewed boom-bust cycle, which would be quite harmful for the global economy," the U.S. Treasury said.

The chairman of the Senate Banking Committee, Connecticut Democrat Christopher Dodd, and Sen. Richard Shelby, an Alabama Republican, on Tuesday said they were offering legislation to give Treasury more tools to pressure Chinese authorities.

"I have long believed that China manipulates its currency, thereby giving it an unfair trade advantage," Shelby said.

They beat two fellow senators — Senate Finance Committee Chairman Max Baucus of Montana and Iowa Republican Sen. Charles Grassley — in unveiling separate legislation.

Baucus and Grassley have scheduled a Wednesday news conference to offer their own bill. Members of the U.S. House also are moving ahead with proposals.

The decision by a Democratic-controlled Congress to push for legal action against China, through the auspices of global institutions like the International Monetary Fund or by putting duties on Chinese imports, challenges Paulson's bid to foster a diplomatic approach toward China.

China dropped a decade-long policy practice of pegging its currency's value to the U.S. dollar in July 2005 when it revalued it by 2.1 percent. Since then, however, the yuan has risen only about another 6 percent against the dollar.

On Wednesday, the yuan was trading in Shanghai at 7.6271 to the dollar, its highest since the 2005 revaluation.

The report said that at the second of a so-called "strategic economic dialogue" last month, Chinese officials repeated to U.S. officials that they were committed to boosting domestic spending and recognized that currency reform was necessary. But the U.S. Treasury acknowledged that real progress was scanty.

"Despite the progress that China has made and the continued public commitment to reform, China's exchange rate is undervalued against the U.S. dollar, even in the view of domestic observers," the report said, adding Beijing's move toward greater currency flexibility "is much too slow and should be quickened."

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