May 25, 2012 / 4:51 PM / 6 years ago

U.S. says China not seeking trade edge with weak yuan

WASHINGTON (Reuters) - The United States ruled on Friday that China was not manipulating its currency to gain an unfair trade advantage but it called the yuan “significantly undervalued” and vowed to press the Asian power for currency reforms.

Many U.S. lawmakers argue China has gained a competitive edge over American manufacturers by keeping the yuan weak to boost exports, and Republican presidential hopeful Mitt Romney has vowed to slap a “currency manipulator” label on China from his first day in office if he wins the White House.

But the Obama administration said in a semiannual report that labeling China a currency manipulator under U.S. law was not warranted, citing a rise in the yuan against the dollar, a drop in China’s trade surplus and commitments Beijing has made to further currency reforms.

“The extent of misalignment appears to have narrowed,” the Treasury Department said.

Still, it said China needed to take further steps to let the yuan, also known as the renmimbi or RMB, rise in value. The U.S. trade deficit with China set an annual record last year at more than $295 billion.

“Available evidence suggests the RMB remains significantly undervalued,” the Treasury said in a statement accompanying the report to Congress. It said it would “press for policy changes that yield greater exchange rate flexibility.”

“We believe further appreciation of the RMB against the dollar and other major currencies is warranted,” it said.

The yuan has appreciated 8 percent against the dollar since June 2010 when China took its currency off a firm peg with the dollar but has been “virtually flat” in 2012, the Treasury noted. Given that prices in China have been rising more quickly than prices in the United States, the yuan’s appreciation has been even greater on an inflation-adjusted basis.

Nonetheless, the Romney campaign accused the Obama administration of yielding to the Chinese.

“We need a president who understands the principles of free enterprise and will stand up for them around the world,” said the candidate’s policy director, Lanhee Chen.

CURRENCY WARS

Some countries don’t see the United States as occupying a moral high ground when it comes to foreign exchange policy.

Washington does not dip into currency markets to manipulate the value of the dollar. But Brazilian President Dilma Rousseff last month complained the extremely loose monetary policy pursued by the U.S. Federal Reserve was helping to keep the dollar weak against other currencies.

That has arguably helped U.S. manufacturers at the expense of factories in Brazil and other emerging market countries. Brazil’s finance minister has coined the term “currency wars” to describe tensions between rich and poor countries over exchange rates.

The dollar has lost about a third of its value since 2002 against a broad basket of currencies. .DXY

China, for its part, has argued in recent months that the yuan is close to an equilibrium level.

The country’s current account surplus, a broad measure of flows of money and goods across its borders, shrank substantially last year as the European debt crisis led to softer demand for its exports and as rising wages paid by Chinese factories made production there less competitive.

In its report, the Treasury said it continued to keep an eye on South Korea, saying intervention by Seoul has helped keep the won currency undervalued by some measures.

“We will continue to press the Korean authorities to limit their foreign exchange interventions,” it said.

Even if the United States labeled China a currency manipulator, it would be largely a symbolic move. Under U.S. law, it would only require Washington to open discussions with Beijing on adjusting the yuan’ s value - a process that is already under way and showing progress.

It has been 18 years since the U.S. Treasury has designated any country a currency manipulator. China was named five times from May 1992 to July 1994. For most of that time, it operated with two exchange rates, but it unified the dual rate in January 1994 as part of reforms to embrace a “socialist market economy.”

The U.S. Senate last year for the first time passed a bill that would have required the administration to slap penalties on Chinese imports if Beijing failed to adopt market-based exchange rates. However, the House took no action and the legislation died.

The report was released ahead of a long holiday weekend and there was little immediate reaction from Capitol Hill. Democratic Senator Sherrod Brown of Ohio said the administration was giving Beijing “a free pass,” while Representative Mary Bono Mack, a Republican, called the determination “a joke.”

Additional reporting by Rachelle Younglai; Editing by Andrea Ricci

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