China Avoids Currency Manipulator Tag

Decision Has Fueled Sharp Criticism From Capitol Hill

China Avoids Currency Manipulator TagDespite maintaining the position that the yuan (renminbi) is undervalued, the U.S. Treasury Department has formally declined to label China a currency manipulator, a decision that has again fueled sharp words from Capitol Hill. In the short-term, the move – made public in a semiannual trade report to Congress – reduces international pressure on Beijing to force its currency to appreciate, while also decreasing the chances of the U.S. imposing trade sanctions.

"The available evidence suggests the renminbi remains significantly undervalued, and we believe further appreciation of the renminbi against the dollar and other major currencies is warranted," the Treasury said.

Since China ended the yuan's de facto peg in June of 2010, the currency has gained 8% against the U.S. dollar, a point the Treasury report highlights. However, policy critics argue the appreciation has been both ineffective and inconsistent. As of last week, the yuan has been nearly flat against the dollar in 2012, actually depreciating by 0.36%. "The administration continues to let China get away with flouting trade rules just for the sake of diplomacy," said Senator Chuck Schumer (D-NY). "Calling out China as a manipulator may be awkward, but it is time to take off the kid gloves."

Holding a different view, John Frisbie, the president of U.S. China Business Council, applauded the Treasury's decision. "Branding China a currency manipulator triggers nothing to help reach the goal of a fully convertible currency and market-driven exchange rate for China," he said. "The manipulator label would likely lead China to react negatively and slow down progress on this issue."

Economists have long held that China intentionally depresses the value of the yuan to provide itself a trade advantage, essentially making its exports cheaper and U.S. imports more expensive. Analysts also believe a stronger yuan would help increase consumer spending in China and make the country's economy less dependent on export-led growth. As it stands currently, though, the U.S. trade deficit with China is on pace to exceed last year's gap of $295.5 billion, an all-time high.