Geithner: real yuan appreciation "substantial"

WASHINGTON Fri Jan 14, 2011 5:46pm EST

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WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said on Friday there has been a "substantial" inflation-induced appreciation in China's yuan currency that Beijing would do well to recognize and counter.

"Because Chinese inflation is accelerating more rapidly than U.S. inflation, the right measure of the pace of appreciation is now more than 10 percent a year, and that is a very substantial, material change," Geithner told reporters at the White House.

In a continuing bid by the Obama administration to persuade China to let the yuan's nominal value rise more rapidly, Geithner opened a new tack earlier this week by saying it would be in China's own interest to do so in order to tamp down inflation in its own economy.

The so-called "real" exchange rate is adjusted to account for the substantial difference between Chinese and U.S. inflation -- 5 percent versus about 1 percent, respectively.

Geithner told an audience on Tuesday that the current "real" pace of appreciation would help correct an exchange-rate imbalance with the U.S. dollar but at an unnecessarily severe cost to China. A stronger yuan in nominal terms could help cap Chinese inflation, Geithner contends.

Geithner spoke to reporters ahead of a January 19 meeting at the White House between Chinese President Hu Jintao and President Barack Obama.

In nominal terms, the yuan has risen about 3.6 percent since China dropped a peg to the dollar in June, touching a record high on Friday. <CNY/>

"The exchange rate has moved up a little over 3 percent ... against the dollar since June of last year. That is an annual rate of about 6 percent, maybe 7, 8 percent a year," Geithner said. "But that is not the best measure of competitiveness ... (which) is the combined effect of that change and the difference between China's inflation rate and ours."

Still, the pace of appreciation has not been enough to please U.S. lawmakers, who argue China deliberately holds down the value of the yuan to gain a trade advantage.

The Treasury Department in October delayed a semi-annual report on the exchange rate practices of major U.S. trading partners, avoiding a decision on whether to label China a currency manipulator.

Treasury is expected to revisit the argument about the difference between real and nominal exchange rates in that report, now expected sometime after the Hu-Obama meeting, but is not expected to pin a "currency manipulator" label on China which could lead to trade actions.

(Additional reporting by Glenn Somerville)

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