US Says China Yuan Undervalued, But Not Manipulated

While the U.S. Treasury Department has ruled that the Chinese government is not manipulating its currency, it still maintains that China must allow its currency to appreciate more quickly. From Reuters:

Although the Obama administration has often used blunt language to warn China over its currency practices, the semiannual report issued by Treasury on Friday maintained its practice of avoiding the harsher step of naming it a currency manipulator.

The department said it concluded China did not meet the U.S. legal definition of a currency manipulator due to the appreciation of its currency — known as the yuan or renminbi — since June 2010 and recent Chinese statements that it would continue to promote exchange rate flexibility.

But a number of factors, including China’s continued rapid accumulation of dollar reserves and a projected widening of its current account surplus, “all indicate that the real effective exchange rate of the renminbi remains substantially undervalued,” the department said.

“Treasury’s view … is that progress thus far is insufficient and that more rapid progress is needed,” the department said in the report.

What exactly is a currency manipulator and how does China’s undervalued yuan affect the U.S. and the world? From CNN:

So what is currency manipulation? And why does it matter?

By selling its own currency and buying up foreign reserves like the U.S. dollar, China has essentially pegged the yuan’s value to the dollar instead of allowing it to move freely in foreign exchange markets.

What’s wrong with that?

Several industrialized nations, including the U.S., think China’s explosive growth is unsustainable, and bad for the global economy. They fear its rapid inflation could ripple through the rest of the world, driving up the price on goods at a time when other economies are still struggling to get back on their feet.

Rapid growth has also led to fears that China’s economy could overheat, and then crash land into a massive slowdown, hindering the world recovery.

Nonetheless, Timothy Geithner has remarked that the yuan’s exchange rate is  “the most important problem to solve in the international monetary system today”. From AFP:

The Treasury report was supposed to have been delivered by April 15, but was delayed to take into account high-level US-China talks in Washington the prior week.

Treasury Secretary Timothy Geithner has called the exchange rate situation with the Asian giant “the most important problem to solve in the international monetary system today”.

The US-China Business Council welcomed the report, saying the Treasury Department “continues to make the right call on China’s currency policy.”

“Designating China as a ‘manipulator’ would achieve nothing,” said council vice president Erin Ennis.

“USCBC believes that Obama administration’s approach of employing multilateral and bilateral engagement with China is the most useful way to make progress on the exchange rate issue.”