WASHINGTON The Treasury Department ruled on Friday China was not manipulating its currency to gain an unfair trade advantage, but said Beijing still needs to allow the yuan to rise much faster in value.
Although the Obama administration has often used blunt language to warn China over its currency practices, the semiannual report issued by Treasury on Friday maintained its practice of avoiding the harsher step of naming it a currency manipulator.
The department said it concluded China did not meet the U.S. legal definition of a currency manipulator due to the appreciation of its currency -- known as the yuan or renminbi -- since June 2010 and recent Chinese statements that it would continue to promote exchange rate flexibility.
But a number of factors, including China's continued rapid accumulation of dollar reserves and a projected widening of its current account surplus, "all indicate that the real effective exchange rate of the renminbi remains substantially undervalued," the department said.
"Treasury's view ... is that progress thus far is insufficient and that more rapid progress is needed," the department said in the report.
The report had originally been due on April 15 but was delayed ahead of a key meeting with senior Chinese officials in Washington earlier this month. China says it is moving to revalue the yuan, but will proceed at its own pace.
The yuan closed at 6.4917 to the dollar on Friday, little changed on the day, but up 5.15 percent since it was loosened from a peg to the dollar in June 2010.
Treasury's decision came as no surprise, even though the U.S. trade gap with China hit a record $273 billion in 2010.
President Barack Obama's Democratic administration has declined to name China as a currency manipulator in five consecutive reports now, following the pattern set by the Republican administration of former President George W. Bush.
Many U.S. lawmakers and import-sensitive manufacturers, such as steel and textiles, claim that China's currency is undervalued by as much as 40 percent, giving Chinese companies an unfair price advantage in international trade.
But Erin Ennis, vice president of the U.S.-China Business Council, which represents roughly 230 American companies that do business in China, said Treasury made the right call.
"While USCBC has advocated repeatedly that China should allow its exchange rate to better reflect market forces, designating China as a 'manipulator' would achieve nothing," Ennis said.
Congress has threatened for years to pass legislation to pressure China to revalue its currency, but so far no bill has reached the president's desk.
Commerce Secretary Gary Locke, tapped to be the next U.S. envoy to China, told the Senate Foreign Relations Committee on Thursday that a more flexible Chinese currency was key to U.S.-China economic rebalancing.
"We are seeing movement on the currency," he said, referring to a roughly 5 percent increase since China slightly loosened the yuan peg to the dollar in June 2010.
"We believe it should float more and faster," Locke said.
By preventing the yuan from rising more rapidly, China imposes an unfair burden on other emerging economies with more flexible exchange rates and eliminates a tool it could be using to counter domestic inflation, Treasury said.
Derek Scissors, a research fellow with the Heritage Foundation, said he agreed with Treasury's decision not to cite China because it should be focused on other Chinese policies that are much more damaging to the United States.
However, the department has turned the report into a "minor joke" by repeatedly delaying its release, he said.
"It is no longer ever issued when scheduled because that time is always wrong for some reason. ... At this point no one should take the report seriously," Scissors said.
Altogether, Treasury reviewed the exchange rate practices of 10 major trading partners in the semi-annual report. It concluded none was manipulating their currency to gain an unfair trade advantage or to prevent an effective balance of payments adjustment.