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US Treasury Recommends 'Close Monitoring' Of China's Exchange Rate

by Glen Shapiro, LawAndTax-News.com, New York

29 December 2011


The United States Department of the Treasury’s Office of International Affairs, in its semi-annual report to Congress, has refused to condemn China’s exchange rate policies, confirming only that it will continue to monitor the level of renminbi (RMB) appreciation.

A six-monthly report is required under the Section 3002 of the Omnibus Trade and Competitiveness Act of 1988, and must consider "whether countries manipulate the rate of exchange between their currency and the USD for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade."

The latest Treasury report reviews the exchange rate policies of ten economies accounting for 70% of US foreign trade. It considers that, while all of the major advanced economies generally have fully flexible exchange rates, Japan twice announced it had intervened unilaterally in the past year.

In addition, among major emerging market economies, a select few have more tightly managed exchange rates, with varying degrees of management, and the report highlights the need for greater exchange rate flexibility to reduce rate appreciation in these economies, including South Korea, but most notably China.

The Treasury notes that, over the past decade, China has resisted very strong market pressures for RMB appreciation, and that “China’s real effective exchange rate has exhibited persistent and substantial undervaluation, although the estimated range of misalignment has narrowed over the course of the past 18 months.”

It considers that “the underlying factors that distort China's economy and constrain global growth remain. China continues to increase its global export market share, it remains heavily dependent on exports, and it has made little progress in making the required shift to domestic consumption. China's large foreign reserve accumulation has prolonged the misalignment in China’s real effective exchange rate and hampered progress toward global rebalancing, including among economies that compete with China for exports.”

Despite the decline in China's current account surplus and its official commitments that it will move more rapidly toward exchange rate flexibility, Treasury assesses that the “movement of the RMB to date is insufficient and more progress is needed.”

Treasury concludes that it will “continue to closely monitor the pace of RMB appreciation and press for Chinese policy changes that yield greater exchange rate flexibility, level the playing field, and support a pronounced and sustained shift to domestic-demand led growth.”

TAGS: economics | law | China | ministry of finance | United States | currency | trade

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