U.S. Criticizes China for Lack of Yuan ‘Flexibility’

By Rebecca Christie

Oct. 16 (Bloomberg) -- The U.S. Treasury Department criticized China for the “lack of flexibility” of the yuan and a buildup of foreign-exchange reserves while stopping short of branding the nation a manipulator of its currency.

“The recent lack of flexibility of the renminbi exchange rate and China’s renewed accumulation of foreign-exchange reserves risk unwinding some of the progress made in reducing imbalances,” the Treasury said in its semiannual report to Congress on the currency policies, using another name for the yuan.

The report released yesterday, which found that no major U.S. trading partner illegally manipulated its currency in the first half of 2009, comes after Group of 20 leaders adopted a “framework” for sustaining global growth and reducing lopsided flows of trade and investment. The framework could see China boosting domestic demand, the U.S. saving more and Europe increasing investment.

“Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 framework,” the report said. “The Treasury remains of the view that the renminbi is undervalued.”

A Chinese central bank spokesman declined to comment today. No comment was immediately available from China’s Foreign Ministry.

‘Structural Imbalances’

The American Chamber of Commerce in China said today that both the U.S. and Chinese economies have “structural imbalances,” which President Barack Obama should discuss when visiting China next month. The yuan’s value is “not a major cause of the U.S. trade deficit with China,” the chamber said in an e-mailed statement.

The yuan traded at 6.8273 against the dollar as of 2:40 p.m. in Shanghai from 6.8287 yesterday. Yuan forwards headed today for the biggest weekly gain in more than six months on speculation the central bank will allow appreciation as exports and inflation pick up. Policy makers halted gains versus the dollar in July last year.

China’s foreign-exchange reserves, the world’s biggest, surged in the third quarter as an economic recovery attracted speculative capital and a weak dollar boosted valuations of its yen and euro assets.

The holdings climbed about $141 billion to a record $2.273 trillion, the People’s Bank of China said this week. That was less than the unprecedented $178 billion gain in the second quarter.

‘Greater Flexibility’

The Obama administration wants China to “pursue policies that permit greater flexibility of the exchange rate and lead to more sustainable and balanced economic growth,” the report said. The U.S. will continue to push China to allow the yuan to appreciate in two-way meetings and through meetings of officials from the Group of 20 nations.

Peoples Bank of China officials have called this year for an alternative to the dollar as a global reserve currency. At the same time, the issue hasn’t been a central point of debate at recent international summits like a meeting of Group of 20 leaders in Pittsburgh last month.

Geithner this year has reiterated the U.S. commitment to a “strong dollar,” and a “special responsibility” to make sure the currency maintains its leading role in the global financial system.

Less ‘Strident’

“Both the U.S. and China have backed away from their more strident foreign-exchange positions,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

“The U.S. is no longer using nearly every international forum to push for Chinese reforms,” he said. “For its part, China has not pressed with the PBOC musings about the need to replace the dollar.”

Under a 1988 law, the Treasury is required to report to Congress twice a year on international economic conditions and exchange-rate policies. The Treasury is required to enter direct talks with a country deemed to be manipulating its currency, and also seek redress through the International Monetary Fund. The last time a country was branded as a manipulator was China, in 1994.

Yesterday’s report also said that “there are clear signs that the economy is stabilizing” and notes improvement in financial markets and economic growth. Still, “the global economic recovery remains incomplete,” it said.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net