Treasury says China is not currency manipulator

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 http://www.marketwatch.com/story/treasury-says-china-is-not-currency-manipulator-2012-11-27-161033039?siteid=bigcharts&dist=bigcharts

 Nov. 27, 2012, 5:37 p.m. EST

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By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) — The Treasury Department on Tuesday again declined to name China a currency manipulator, citing progress in the emerging nation’s currency appreciation.

In its semiannual report on exchange-rate policies, the Treasury said China’s currency remains “significantly undervalued,” and that “further appreciation of the [yuan] against the dollar and other major currencies is warranted.”

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President Barack Obama has argued that pressure from his administration has pushed the Chinese currency higher against the dollar.

Treasury said that the yuan USDCNY -0.0032%  has appreciated by 9.7% against the dollar since June 2010 and 12.6% when adjusted for inflation. Read the full report.

Labeling China a “currency manipulator” would likely be more of a symbolic move, but it could have a trade impact. The designation would only trigger official talks between the United States and China over the value of the yuan.

But analysts said the key impact of the label would be to give Congress a green light to impose tariffs on Chinese imports.

Measures to slap punitive tariffs on Chinese products have long been popular in Congress, but have never cleared both chambers.

Many U.S. manufacturers argue that China has held the value of its currency artificially low in order to lower the cost of its goods in the United States.

Reuters

President Barack Obama shakes hands with China's Xi Jinping (at left) in the Oval Office earlier this year.

Through September, America has run up a trade deficit in goods of $232 billion this year against China, according to Commerce Department data. That’s wider than the $217 billion trade gap through the same period of 2011.

Supporters of free trade worry that the tariffs might violate World Trade Organization rules and could prompt Beijing to retaliate, as it has done so in other trade disputes.

For this reason, a succession of U.S. administrations has argued that behind-the-scenes pressure was much more effective to get China to strengthen its currency.

In a statement, Sen. Charles Schumer, a Democrat of New York who has complained about the impact of Chinese imports on manufacturers in his state, said he was disappointed in the decision. “It’s time for the Obama administration to rip off the Band-Aid, and force China to play by the same rules as all other countries,” he said in a statement.

The value of China’s currency became a election-year issue, especially in the swing state of Ohio. Republican presidential candidate Mitt Romney had promised to cite China as a currency manipulator during his first day in office. He lost the state as well as the national election.

Obama’s campaign, in contrast, announced various trade sanctions against China and also criticized Romney’s ties to Chinese companies.

The last time that China was cited as a currency manipulator was in 1994, and that was for a completely different issue.

Chinese officials have always denied that they were manipulating the currency and have said they would gradually allow more flexibility.

Treasury said that reserve accumulation by China, an indicator of the degree of China’s intervention in the currency market, has slowed markedly since the third quarter of 2011.

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According to Chinese data, reserve accumulation has slowed to an average of $18.7 billion per quarter in the year ended Sept. 30, compared with an average $140 billion per quarter during the prior year.

Even with the slower pace of accumulation, China’s official foreign reserves remain exceptionally high. As of the end of September, the People’s Bank of China held $3.3 trillion in foreign reserves, equivalent to 42% of China’s gross domestic product.

This stock of reserves is almost as large as the total amount of reserves held by all G-7 countries combined, according to the Treasury.

Its report urged China to be more transparent about the degree of intervention in the currency market, saying that reserve accumulation only provides “some indication” of the country’s moves in the market.

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.