The Treasury Department on Wednesday declined to label China a currency manipulator, retreating from tough talk last year when a campaigning Barack Obama said Beijing had kept its currency's exchange rate unfairly low.
In a semiannual report to Congress on currency practices of key trading partners, the Treasury said all were suffering from the current global economic downturn, but said none manipulate their currencies for trade advantage.
While the Treasury said it remains of the view that the yuan is undervalued, as shown by China's huge trade surpluses and foreign exchange reserves, it did not estimate the level at which the yuan, also called the renminbi, should be trading.
Both Obama, while campaigning for president, and Timothy Geithner, now the Treasury secretary, had explicitly said in a written statement to the Senate Finance Committee that China manipulates its currency's value. The report's findings that it does not may provoke lawmakers' anger.
We continue to believe that China manipulates its currency, said Sen. Charles Schumer, a New York Democrat who has been a vocal critic of Beijing.
We understand that global economic conditions make it difficult for the Obama administration to make this determination at the present time. But we are relying on the administration, as market conditions clear up, to keep China's feet to the fire on this issue, Schumer said.
Senators will reintroduce legislation giving the White House new tools to press China on the currency front, he said.
In a nod to business groups and politicians who remain critical of Beijing's currency practices, the Treasury said it will keep pressing Chinese authorities at every turn to allow more exchange rate flexibility and to take steps to spur domestic demand.
Business groups' reaction to the Treasury announcement was mixed.
The National Association of Manufacturers said it was a missed opportunity on the Treasury's part, adding it was likely to continue to be troublesome.
China's currency is very undervalued and ... it has to be dealt with, said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. The longer it's not dealt with, the more difficult it gets to resolve both for China and the United States.
But Rob Nichols, president of the Financial Services Forum, said it was a sensible approach to a complicated issue.
The most effective way to achieve the goal of a flexible, market-based exchange rate in China is to maintain the engagement posture and open dialogue under way, Nichols said.
U.S. steel manufacturers and the AFL-CIO labor federation both said they were disappointed by the Treasury's decision and called on Congress to address the issue.
At a briefing, a senior Treasury official said the White House was consulted during preparation of the report. He said current global economic conditions were much bleaker now than has been the case for the past decade, when U.S. anger at alleged China currency manipulation was on the rise.
The financial crisis has really changed the context. We're looking at a global recession, the official said.
Last year, Obama told the Ohio Conference on Fair Trade that currency manipulation by China gave it an unfair trade advantage that cost American jobs. He vowed to take a harder line.
The Bush administration has utterly failed to address this growing threat to U.S. business, Obama said. I am committed to tackling this problem and ensuring that all trade manipulations are addressed by the U.S. government.
In January, Geithner told Congress that Obama, backed by a wide range of economists, believes that China is manipulating its currency. That heightened expectations the Obama administration might be ready to shift policy and name China as a manipulator.
If that happened, the Treasury would have to begin talks with Beijing and involve the International Monetary Fund in the process, possibly an uncomfortable step since the United States is counting on China to keep buying its debt securities.
In the 52-page currency report, the Treasury said Beijing has allowed the yuan to appreciate 16.6 percent between June 2008 and February 2009 and that, as the financial crisis intensified, the yuan appreciated slightly against the dollar.
In addition, it said China has put in place a large fiscal stimulus program, second in size only to the United States', and that should act as a spur to domestic demand that will help rebalance global growth.
In a statement, Geithner said measures so far should be just a beginning to a series of policy steps to rebalance the Chinese economy so that economic growth is more dependent on domestic demand, particularly private consumption.
(Reporting by Glenn Somerville and Doug Palmer; editing by Dan Grebler)