U.S. Finds No Conclusive Evidence of China Currency Manipulation

By Susan Krause
Washington File Staff Writer

Washington - The United States is deeply concerned about China's international economic and exchange rate policies, but has not found conclusive evidence to show that China is intentionally manipulating its currency regime, according to a report released May 10 by the Department of the Treasury.

In its semi-annual Report on International Economic and Exchange Rate Policies, submitted to Congress as required by the Omnibus Trade and Competitiveness Act of 1988, the Treasury found that "far too little progress has been made in introducing exchange rate flexibility for the renminbi (RMB)," China's currency. 

"Let us be clear:  we are extremely dissatisfied with the slow and disappointing pace of reform for the Chinese exchange rate regime," Treasury Secretary John Snow said in a statement released with the report, which covers the second half of 2005. 

After reviewing several different factors, however, the Treasury determined that China did not meet "technical requirements" necessary to be designated a currency manipulator under the terms of the trade act, according to the report. 

"In the final analysis," Snow said, "the Treasury Department is unable to conclude that China's intent has been to manage its exchange rate regime for the purposes of preventing effective balance of payments adjustment or gaining an unfair advantage in international trade."


China's leadership has made a public commitment to implement reforms as the country is undergoing profound economic transformation, Snow said.  He cited statements from China's President Hu Jintao and Premier Wen Jiabao as evidence that "China does not want a large current account surplus and will act to reduce it."

"Of course, words must be backed by action, and China is taking some action," Snow said.

A first step, according to the Treasury report, was China's July 2005 decision to end an eight-year policy that pegged the value of the RMB to the dollar, replacing it with a managed floating exchange rate.  That change resulted in a slight appreciation - 2.6 percent - of the RMB against the dollar.  (See related article.)

China has also moved to develop a foreign exchange market infrastructure and modernize its financial sector, the report says.  The country's most recent five-year plan emphasizes consumption and rural development to stimulate domestic demand as an engine of growth.  

The Treasury Department has pushed for such reforms over three years of intensive engagement with China, Snow said. 


Nonetheless, the report cautions, "While these developments suggest that progress is being made, China's advances are too slow and hesitant given China's own needs, and its responsibilities to the international financial community."

Because of its relatively rigid exchange rate, Snow said, "China lacks effective monetary policy tools to avoid the boom-bust cycles it has experienced in the past." 

China's economy is now strong enough and far enough along in its transition to begin to move more rapidly toward exchange rate flexibility, the report says.  

The United States is not alone in its concern about China's exchange rate policies, according to Snow.  The Group of Seven (G7) industrialized nations, the International Monetary Fund (IMF), and the Asian Development Bank (ADB) have all encouraged China to increase the flexibility of its exchange rate, he said.

"It is important for China to understand that its exchange rate regime is not simply a bilateral U.S.-China issue, but a multilateral issue," the secretary said.  "Chinese exchange rate practices affect the entire world."

Snow said the United States will continue to monitor China's progress on exchange rate flexibility "every step of the way."

"The entire international community must work together cooperatively to address global imbalances," he said.  "But it is a matter of extreme urgency that China act immediately to increase the flexibility of its exchange rate regime before real harm is done to its own economy, to its Asian neighbors, and to the global financial system."

The full text of the International Economic and Exchange Rate Policies report, its appendices, and related fact sheets can be found at the Treasury Department's Web site.

For additional information on U.S. policies, see Trade and Economics and The United States and China.