The US Treasury in a surprise move refused to label Chinese monetary policy as being manipulative while chiding Japan for intervening in the currency market to stem the rise of its yen. US officials also criticised South Korea for currency interventions and urged to avoid such moves.
American politicians constantly blame China of gaining unfair competitive edge in global markets by tightly controlling the value of yuan and keeping it low to boost exports. US President Barack Obama has also issued veiled threats to Beijing in the past and asked the country to adjust the value of its currency.
In a semi-annual report, the US Treasury noted that China did not meet the statutes that cover the designation of currency manipulator but voiced its frustration that appreciation in the yuan has not been steady and ‘sufficient’.
“Treasury will closely monitor the pace of appreciation and press for policy changes that yield greater exchange rate flexibility, a level playing field, and a sustained shift to domestic demand-led growth,” the department said in the Congressional report on international economic and exchange rate policies.
The rate of the yuan, closely managed by Chinese central bank, has risen 4 per cent against the dollar this year and 7.7 per cent since a firm peg against the greenback was abolished by Beijing in June 2010. The Peter Institute for International Economics, US economic think thank, reckoned the value of yuan is undervalued by 24 per cent against the dollar. The Washington DC-based centre insisted last year the Chinese currency was 28 per cent undervalued against the US currency. The drop has been attributed to both Beijing’s policy of gradual currency appreciation and higher inflation in the country.
US trade deficit swelled to a record $273.1 billion from about $226.9 billion in 2009 triggering massive trade spat between the world’s top economies. Many leading economists believe the cumulative Jan-Oct deficit with the East Asian nation, running at around $245.5 billion, will add more fuel to the fire.
The US Senate has already passed a bill earlier this year that demands the Obama administration to slap penalties on any Chinese imports that fail to adopt the market-based exchange rate mechanism. While the bill is making rounds to become a law, which many analysts believe is unlikely to happen, frustration of US lawmakers over the trade imbalance is everywhere to be seen.
US President Barack Obama already criticised China at the November APEC meeting when he told Chinese President Hu Jintao to act like “a grown-up” and play by global trade rules.
According to a commentary on Chinese state news agency, US Treasury’s decision not to label China a currency manipulator is a ‘positive signal’ that would sooth the market and boost trade ties. Beijing has always warned Washington not to ‘politicise’ the currency issue and expressed its surprise over US policy of appeasement towards intervention in currency markets by Japan and Switzerland.
The Treasury report criticised Japan for its preemptive yen-selling in August and October that followed a joint G7 action in the aftermath of the devastating 11 March earthquake in the Asia-Pacific nation.
“The unilateral Japanese interventions were undertaken when exchange market conditions appeared to be operating in an orderly manner and volatility in the yen-dollar exchange rate was lower than, for example, the euro-dollar market,” the report noted.
“In contrast to the post-earthquake joint G7 intervention in March, the United States did not support these interventions,” the Treasury added, urging Tokyo to pursue reforms that would revive its domestic economy instead of trying to influence the exchange rate.
Japanese officials related to the finance ministry refused to respond to the report or issue a comment. One official, however, speaking to Reuters on condition of anonymity said: “This report does not make it more difficult for Japan to intervene. We are committed to doing whatever is necessary.”
Japanese exporters lament the ultra-strong value of yen which they insist puts them at a competitive disadvantage. The yen was trading at just under 78 to the US dollar on Thursday morning, about 3 per cent weaker since Tokyo aggressively intervened to stem the rise on 31 October.
South Korea also received a rap in the US treasury report which said “Seoul should limit their FX interventions to exceptional circumstances of disorderly market conditions and adopt a greater degree of exchange rate flexibility.”
Some US manufacturers have been hit very hard by direct competition from China and other emerging economies and demand their government take strong action against ‘uncompetitive’ foreign products and their producers.
“China’s currency is still enormously undervalued,” Scott Paul, executive director of the Alliance for American Manufacturing, an industry lobby for hard-hit textile, steel and labour groups said in a statement.
“I’m disappointed that President Obama has now formally refused six times to cite China for its currency manipulation, a practice which has contributed to the loss of hundreds of thousands of American manufacturing jobs.”
Currently, China is the biggest holder of US Treasuries by holding about $1.1 trillion which gives it leverage in international economic negotiations
Sources: Reuters, Wall Street Journal, China Daily
(Written by Pratish Amin; Edited by Moign Khawaja)