Treasury Declines to Tag China As Currency Manipulator

[rkahn]

Does anyone mind shedding some light on this article? I am a bit confused about the situation with China's currency.

Treasury Declines to Tag China
As Currency Manipulator
By TOM BARKLEY
December 20, 2007; Page A2

WASHINGTON -- The Treasury Department, despite increasing pressure from Congress, once again declined to designate China as a currency manipulator whose policies hurt its trading partners.

In its latest semiannual report to Congress on the currency policies of countries around the world, the Treasury reiterated its complaint that the recent appreciation in the Chinese yuan is "too limited and modest," but argued that the government's heavy intervention doesn't meet the legal definition for currency manipulation.

"China should significantly accelerate the appreciation of the [yuan's] effective exchange rate in order to minimize the risks that are being created for China itself as well as the world economy, of which China is an increasingly critical part," the Treasury said.

The U.S. will continue to use every opportunity to stress to Chinese leaders "the need for China to rebalance growth, including reform of the exchange-rate regime," it said.

China abandoned a strict currency peg in July 2005, but it maintains a trading band around an unspecified basket of currencies that includes the dollar and euro. That band has gradually been widened, and the yuan has appreciated 12.1% against the dollar since it was de-pegged and about 6% against the dollar this year. The yuan has strengthened 3.8% against the currencies of China's major trading partners overall since July 2005.

The imbalances in China's economy, both domestic and external, have continued to worsen, the Treasury said, citing rising inflation and the growing current-account surplus.

Still, Treasury Secretary Henry Paulson has resisted pressure from members of Congress in both parties to take action against what they claim is a grossly undervalued currency that provides China with an unfair trade advantage. Mr. Paulson has opted instead for diplomacy, though he came away from last week's Strategic Economic Dialogue in China with no new concessions on the currency front.

There are two bills that have passed out of Senate committees that would retaliate against China's currency policy, though neither has been brought up for a full vote. Senate Finance Committee Chairman Max Baucus (D., Mont.), who co-sponsored a currency bill that passed through the committee in July, said he is disappointed by the Treasury's "continued timidity" on the issue.

"Clearly, good economic sense and forceful dialogue haven't compelled China to meaningful currency reform," Sen. Baucus said in a statement. "Perhaps congressional action can be more persuasive next year."