Washington, Dec 28, 2011 (TSR) – The Treasury Department on Tuesday said China was not a currency manipulator, a move that allows the White House to avoid the escalation of a trade dispute with China while escaping some of the fallout due to Congress’s being out of town.
In the long-delayed semiannual report to Congress on currencies, the Treasury Department cited the 7.5% appreciation in the yuan vs. the dollar since June 2010, the decline in China’s current-account surplus, as well as China’s official commitments at global gatherings to move more rapidly toward exchange-rate flexibility.
Factoring in the higher rate of domestic inflation in China compared with the U.S.’s, the yuan has gained nearly 12% on the greenback in real terms since June 2010, when China took steps to allowing increased flexibility in its currency.
The agency noted that foreign-reserve accumulation likely slowed significantly in the fourth quarter due to cooling capital inflows and increased uncertainty about the global economy.
Still, Treasury said it will continue to “closely monitor” the pace of yuan appreciation and press for policy changes that will yield greater exchange-rate flexibility, level the playing field, and support a shift in China toward domestic-demand-led growth.
The twice-a-year report traditionally represents a balancing act for the White House, for both Republican and Democratic administrations.
With a $245 billion trade surplus in goods with the U.S. through October, the Asian nation has few friends on Capitol Hill, neither among union-friendly Democrats nor Southern-state Republicans. The Senate passed a bill this year on a bipartisan vote that would make it easier to impose sanctions on China, but the House hasn’t taken the bill up.
Republican presidential candidate Mitt Romney has said he’d brand China a manipulator on his first day in office.
At the same time, the government fears branding China a manipulator as that nation represents a fast-growing market for U.S. exports for companies including General Motors and Caterpillar , not to mention a source of cheap goods for the likes of Wal-Mart Stores. Labeling China a manipulator would not automatically trigger sanctions but would put the U.S. on the road toward doing so, which likely would invite countersanctions from China.
The U.S. would have to open negotiations with China if it called the country a manipulator, which it hasn’t done since 1994.
Economists note that the exchange rate is hardly the only factor behind China’s massive trade imbalance with the U.S.
“Right now you have a situation where Chinese labor costs are one-tenth of the U.S. costs, [which] makes [even] Mexican labor look expensive,” said John Lonski, chief economist of Moody’s Analytics’ capital-markets research group, in an interview with MarketWatch earlier this month.
“On top of that, you have to deal with how China’s workforce has become increasingly skilled while remaining relatively cheap and inexpensive.”
Meanwhile, China is taking its own steps to diversify away from the U.S. dollar and U.S. government securities. On Monday, China and Japan agreed to start direct trading of their currencies.
AUTHOR: Steve Goldstein
Steve Goldstein is MarketWatch’s Washington bureau chief.