WASHINGTON – Amid escalating tensions with the U.S. over the value of its currency, the People’s Bank of China announced Saturday that it will move toward a more flexible exchange rate to bolster the global economic recovery that is underway.

 

“The global economy is gradually recovering,” China‘s central bank said in a statement posted on its Web site Saturday. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB [renmibi] exchange rate regime and increase the RMB exchange rate flexibility.” But the central bank stressed that there are no plans to allow the value of its currency to appreciate significantly in the short term. “With the BOP [balance of payment] account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist,” the bank said. “The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China”

 

The announcement by China’s central bank comes a week before the G-20 summit of world leaders in Toronto and on the heels of increasing pressure from President Obama and U.S. lawmakers, prodding the Chinese to allow it currency to appreciate. Critics of China’s currency policies argue that its currency is undervalued by as much as 40 percent, which makes China’s exports cheaper and puts U.S. produced goods at a competitive disadvantage. “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Obama said in a statement Saturday. “I look forward to discussing these and other issues at the G-20 Summit in Toronto next weekend.”

 

China delinked the yuan to the dollar in 2005 and pegged it to a basket of currencies, allowing it to rise by about 20 percent through 2008. But the yuan has been frozen for more than a year because of the global recession. Treasury Secretary Timothy Geithner delayed a highly anticipated biannual currency exchange report in April that could have labeled China a currency manipulator, which would lead to consultations and possible sanctions by the U.S. at the World Trade Organization if the country refused to allow its currency to appreciate.

 

“We welcome China’s decision to increase the flexibility of its exchange rate,” Geithner said Saturday. “Vigorous implementation would make a positive contribution to strong and balanced global growth” But U.S. lawmakers sounded a cautious tone. “This is a positive first step, but it remains to be seen whether this move will be more symbolic than significant,” said House Ways and Means Chairman Sander levin (D., Mich.). “The significance of this policy will depend on how much the Government of China allows the renminbi to appreciate over time. We have seen actions like this before and it is clear that China did not allow enough appreciation the last time it adopted a policy like this one, from 2005-2008. If China takes that same approach again, the United States will still need to take action.”

 

Sen. Charles Schumer (D., N.Y.) has been the most vocal in calling for punitive action against China and he has vowed to try to move his legislation against China in a few weeks. He introduced a bill with Sen. Lindsey Graham (R., S.C.) that would impose punitive tariffs on imports from countries deemed to be manipulating their currency by not allowing it to appreciate. The measure would give less flexibility to the Treasury Department in citing countries for currency manipulation. The bill would also make it easier for U.S. companies to bring antidumping and countervailing duty cases against imports from China and other nations found to be manipulating their currency because it allows the Commerce Department to treat currency manipulation as an unfair subsidy.

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