U.S. Accuses China of Undervaluing Its Currency

The U.S. on May 15 accused China of keeping its yuan currency "substantially undervalued," but stopped short of branding Beijing a currency manipulator. "Neither China or any other major trading partner of the United States met the requirements" for U.S. designation of having manipulated its currency, the Treasury said in a highly anticipated report on foreign-exchange rates. Still, the U.S. ratcheted up its longstanding criticism of China's yuan, or renminbi (RMB).

"The recent acceleration (in the yuan's value) in appreciation is a welcome development. However, overall gains remain insufficient," the twice-yearly Treasury report to Congress said.

As of April 15, the Treasury said the yuan had gained 18.4% in value against the dollar since China ended the dollar peg in 2005. It called on China to maintain the recent faster pace of yuan appreciation, "as the currency remains substantially undervalued" and upward market pressures on the currency "remains strong."

President Bush's administration has resisted stiff pressure from some lawmakers to sanction China for currency manipulation.

The U.S. trade deficit with China ballooned 10% last year to a record $256.3 billion, provoking fresh protests in Congress and the business sector that the Asian powerhouse deliberately manipulates the yuan to maintain an unfair trade advantage.

The Treasury report highlighted that China's currency undervaluation is creating risks "for itself, the Asian region and the world economy in which China is playing a greater role. Chinese exchange-rate practices justifiably remain a focal point for the international community."

It underscored that China's "rigid forex policycontinues to support large-scale domestic liquidity creation, which threatens monetary and price stability," and urged China to "intensify its efforts to rebalance its economy." Specifically, the Treasury recommended that China boost domestic demand and consumption-led growth, reform its financial system, and achieve "greater monetary policy autonomy" through rapid yuan appreciation and "greater flexibility" of its forex regime.