US Treasury stops short of blaming China for currency manipulation UPDATE

by : Thomson Financial
Forex News

(Updates to add details throughout)

WASHINGTON (Thomson Financial) - China is not intentionally manipulating its currency to gain an unfair trade advantage, but its massive buildup of foreign reserves raises risks for the global economy, the US Treasury's semi-annual report said today.In the much anticipated report, the Treasury stopped short of labelling Beijing a currency manipulator, which could trigger sanctions under US law.It did call for the Asian nation to speed up its currency appreciation to avoid what it called real 'risks' for the global economy. The yuan has appreciated by a bit more than 8 pct since July 2005, a pace that the US has said is not fast enough.'Allowing the currency to adjust is a matter of international interest and responsibility, with critical implications for the smooth functioning of the world's largest trading system and the adjustment of global imbalances,' the report said.'China should not hesitate any longer to take far more vigorous action to rebalance its economy, promote immediate (yuan) movement to tackle the currency's undervaluation, and achieve far greater flexibility in the exchange rate regime.'The Treasury report was released on the same day key senators are expected to introduce legislation aimed at forcing the US to put more pressure on China, possibly by bringing a World Trade Organization dispute settlement case against China's currency regime.Many members of Congress are upset that the administration has failed to cite China as a manipulator, even while it agrees that the yuan is undervalued.The Treasury report said it could not determine whether China was keeping the yuan undervalued in order to gain a trade advantage. The department has said this finding must be made before it formally cites any country as a currency manipulator, a move that would be followed by formal consultations.The report said US officials are already pressing China on currency reform in a wide range of bilateral talks.'China's tightly managed exchange rate regime is a substantial obstacle to the resolution of economic imbalances that foster China's high savings, high investment, and large trade surpluses,' the report said. Treasury said China's net exports reached a record 7.3 pct of China's GDP in 2006, and said China's current account surplus reached a record 250 bln usd that year.The Treasury has been working with China to promote domestic growth over the last year, but the report said China's 'grew more unbalanced in 2006', and said this trend can be seen in the levels of China's intervention in currency markets. The People's Bank of China's intervention level increased by 247.5 bln usd in 2006 over 2005 to reach 1.066 trillion usd that year.The Treasury said all of these factors 'increase the risk of a renewed boom-bust cycle, which would be quite harmful' for the world economy.The Treasury also reiterated that US officials do not believe the Japanese yen is being manipulated, despite continued pressure from US automakers to make this finding.'Japan maintains a floating exchange rate regime,' the June 13 report said. 'Japanese authorities have not intervened in the foreign exchange market since March 2004.'