The U.S. Treasury again shied away from labelling China a currency manipulator on Tuesday, but it rapped the country for not moving quickly enough on exchange rate reforms.
Some U.S. politicians have argued that China has gained an unfair competitive edge in global markets by keeping the yuan artificially low to boost exports, and pressure has mounted in Congress for President Barack Obama to punish China.
But the administration prefers to tread softly and use diplomacy to effect change. The U.S. Treasury, in a semi-annual report, as usual said that statutes covering a designation of currency manipulator have not been met with respect to China.
It repeated its standard line that appreciation in the yuan has been too slow, calling it insufficient.
Treasury will closely monitor the pace of appreciation and press for policy changes that yield greater exchange rate flexibility, a level playing field, and a sustained shift to domestic demand-led growth, it said in the report to Congress on international economic and exchange rate policies.
The value of the yuan, which Beijing manages closely, has risen 4 percent against the dollar this year and 7.7 percent since China dropped a firm peg against the greenback in June 2010. The Peterson Institute for International Economics recently estimated the yuan was undervalued by 24 percent against the dollar, down from 28 percent earlier in the year. It attributed the change to both Beijing's policy of gradual currency appreciation and higher Chinese inflation.
At the heart of the friction between the two countries is a U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009. The cumulative Jan-Oct deficit with China is on track to top that this year, running at around $245.5 billion.
The U.S. Senate this year for the first time passed a bill that would require the administration to slap penalties on Chinese imports if it fails to adopt market-based exchange rates. While the measure has made no progress in the lower chamber and is unlikely to become law, it shows the mounting U.S. frustration with its vital trade partner.
President Obama at the November APEC meetings, in his toughest words yet, told President Hu Jintao that China must play by global trade rules and act like a grown-up.
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But U.S. Treasury Secretary Timothy Geithner has said the law on the FX report, which requires the administration to determine whether U.S. trade partners are deliberately undervaluing their currencies, is a poor tool to push Beijing on the yuan.
Instead, the United States prefers to argue for change at its regular closed-door meetings with Chinese officials. It also uses international economic forums, such as the Group of 20 leading nations and the International Monetary Fund, to ramp up public pressure on Beijing to move more quickly to a more-flexible currency.
China is the biggest foreign holder of U.S. Treasuries, with about $1.1 trillion, a position that gives it leverage in international economic negotiations. Foreign exchange traders had not expected a change of U.S. tactics.
It's not very surprising. It's sort of sliding it in under the radar. They're (Treasury) really not in a position to make any major moves at this point, said Sean Incremona, an economist at 4Cast in New York.
The Treasury Department has not labelled a country a currency manipulator since July 1994, when it cited China. A designation would require the United States to step up negotiations with Beijing on the yuan's value.
The yuan slipped on Tuesday as strong dollar demand from corporations offset a record high mid-point fixed by the People's Bank of China. The central bank set an all-time high dollar/yuan mid-point in an apparent move to let the yuan rise a little more at the end of 2011 so as to make the yuan's full-year nominal appreciation look bigger, traders said.
Some U.S. manufacturers, which have been hit hardest by competition from China and other emerging economies, would still prefer the U.S. government to take a harder line.
China's currency is still enormously undervalued, said Scott Paul, executive director of the Alliance for American Manufacturing, an industry lobby for hard-hit textile, steel and labour groups.
I'm disappointed that President Obama has now formally refused six times to cite China for its currency manipulation, a practice which has contributed to the loss of hundreds of thousands of American manufacturing jobs.
(Additional reporting by Luciana Lopez and Doug Palmer; Editing by Leslie Adler and Dan Grebler)