Treasury Report Says China Not a Currency Manipulator

The Treasury Department delivered to Congress May 10 its semiannual report on foreign currency practices. The report once again expresses particular concern about the international economic and exchange rate policies of China and says that far too little progress has been made in introducing exchange rate flexibility in that country. However, Treasury again declined to name China as a currency manipulator, saying it was unable to determine that China’s foreign exchange system was operated during the last half of 2005 for the purpose of preventing adjustments in China’s balance of payments or gaining an unfair competitive advantage in international trade. The report said that, given the importance of China to the world economy, Treasury will continue to closely monitor China’s progress in implementing its economic rebalancing strategy, remain fully engaged at every opportunity with China, and continue actively and frankly to press China to quicken the pace of currency flexibility.

The report took into account the following factors in reaching its conclusion.

• On July 21, 2005, China abandoned the yuan’s eight-year peg to the dollar and moved to a managed floating exchange rate regime. Since that time, the yuan has further appreciated, though slightly, against the dollar. The report notes that the examination period for this report is the first that includes the exchange rate policy change.

• China’s commitment to move to a flexible exchange rate has been repeated at the highest levels of the Chinese leadership. During his visit to the U.S. in April, President Hu Jintao said that China will continue to develop the foreign exchange market and increase the flexibility of the exchange rate. Premier Wen Jiabao, in his policy speech to the National People’s Congress on March 14, stated that China will expand the foreign exchange market and allow more flexibility and fluctuation of the Chinese currency.

• The report says that China’s leaders have begun a fundamental realignment of the Chinese economy to reduce its balance of payments surplus, boost domestic consumption and reduce domestic inequality. China’s most recent five-year plan places strong emphasis on consumption and rural development to spur domestic demand.

• The governor of China’s central bank, Zhou Xiaochuan, announced a five-point plan on March 20 to reduce China’s current account surplus and raise domestic consumption. This plan involves actions to boost domestic demand, reduce savings, accelerate the removal of trade barriers, grant greater market access for foreign firms and achieve greater exchange rate flexibility.

• China's leadership has made a clear commitment to rebalance the sources of growth in the Chinese economy. President Hu, in his April 20 meeting with President Bush, stated that China does not want a large current account surplus and would take steps to reduce it, relying on domestic demand to boost growth.

• China’s ongoing efforts to modernize its financial sector are also part of a commitment to spur consumption and achieve long-term reversals in recent trade and current account trends. Progress on this front increased during the reporting period, but massive challenges remain.

The Bush administration has been under increasing congressional pressure to act on China’s currency policies. It is not yet clear what the response will be to Treasury’s most recent decision not to label China a currency manipulator; however, it appears increasingly likely that some type of China legislation could pass before year’s end. In a press release, Sen. Charles Grassley, R-Iowa, said the report shows that “our current law isn’t working.” Grassley for passage of legislation that he and Sen. Max Baucus, D-Mont., have introduced that would overhaul U.S. currency oversight laws and bolster U.S. trade enforcement capabilities.