U.S. declines to label China a currency manipulator

WASHINGTON -- The Obama administration may be getting tougher with China on trade, but its approach in dealing with Beijing on the thorny currency issue remains patient diplomacy.

The Treasury Department, in its semiannual report Friday on exchange-rate policies, once again refrained from labeling China a currency manipulator -- an accusation that would embarrass Beijing and trigger negotiations and possibly even lead to U.S. sanctions.

The Treasury report made plain that U.S. officials believe that China?s currency, the yuan, remains ?significantly undervalued.? An artificially cheaper yuan gives Chinese exporters an extra price advantage in selling their goods in the U.S. But Treasury still declined to cite China, saying that the Chinese have made progress in correcting currency and related imbalances and also have assured the U.S. that they would move more quickly to adopt a more flexible, market-based exchange-rate system.

Treasury officials didn?t say how much they think the yuan remains undervalued against the dollar and other major currencies, but their report cited estimates of 3% to 23% from the International Monetary Fund in July 2011.

China has long tightly controlled the yuan?s exchange rate rather than letting it float freely in international currency markets. But since mid-2005, Beijing has allowed the yuan to rise about 30% against the dollar --? and even more when adjusting for inflation.

But so far this year, the yuan?s value hasn?t budged against the dollar. And with China?s economy now cooling -- and uncertainties in Europe making the slowdown all the more dicey -- analysts doubt that Beijing will let its currency strengthen anytime soon.

The Eurozone?s debt troubles have pushed the euro down sharply to near multi-year lows, and given that the Chinese yuan has been pegged to the dollar this year, the fall in the euro means Chinese goods have become more expensive in the important European market.

?The pressure within Beijing coming from the coastal [manufacturing] provinces is very strong right now -- no ?more appreciation,? said ?Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics.

As in the past, the Treasury?s decision Friday was immediately criticized by some U.S. manufacturing alliances, but other American business groups praised it as a level-headed move that would avert an escalation of trade tensions with Beijing.

Mitt Romney, the likely Republican presidential nominee, has said that he would label China a currency manipulator, although analysts note that Obama also had spoken tough on the China currency issue before he assumed the White House.

In an election year, Obama has stepped up his talk and actions on China?s trade practices. Last week the Commerce Department slapped stiff tariffs on solar panels imported from China. And earlier this year, Obama established a new trade enforcement unit to crack down on violators, specifically naming China as a potential target, as part of an overall strategy to boost domestic manufacturing, exports and jobs.

?The last thing they [the Obama administration] want is to have a good opening by the Republicans to say they?ve been soft on China,? Hufbauer said.

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