WASHINGTON — The Bush administration said Monday that China’s recent steps in reforming the fixed exchange rate between the yuan and the dollar were sufficient to avoid being categorized a “manipulator” of currency, which could have lead to World Trade Organization export sanctions.
Treasury Secretary John Snow stopped short of designating China a country that “manipulates its currency” in a semiannual report to Congress that assesses exchange-rate policies and determines whether they create unfair trading practices. The administration for two years has used so-called financial diplomacy in an effort to convince China to adopt a new exchange rate system.
Snow’s report was likely to disappoint lawmakers who have pressured the administration to crack down on what they claim are China’s unfair trading practices and business groups alleging that U.S. manufacturers are losing jobs because of China’s undervalued currency.
Critics of China’s fixed currency, including U.S. textile industry executives, argue that it artificially lowers the price of Chinese goods by as much as 40 percent and subsidizes exports, putting U.S. companies at a disadvantage and leading to job losses. They have also argued that a lack of currency flexibility has been a major factor in a trade deficit with China that reached a record $162 billion last year.
After months of political and market pressure, China in July stopped pegging the yuan strictly to the dollar and instead pegged it to a basket of currencies, strengthening it by 2.1 percent to 8.11 for every dollar — a move many economists and business groups dismissed as being too little.
“Because of this action and China’s stated and repeatedly reaffirmed commitment to enhanced, market-determined currency flexibility, Treasury has refrained from designating China at this time,” the report stated. “China’s commitment to put greater emphasis on sustainable domestic sources of growth, including by modernizing the financial sector, which will support and complement greater currency flexibility, also factored into this decision.”
Snow said in a statement that China must make further progress “to incorporate flexibility reflecting underlying market forces in China’s … exchange rate by the time of the next Foreign Exchange Report.”
“While China has taken additional steps to develop a market-based exchange rate and further open capital markets, its progress to date is limited and far too slow to be sufficient,” he said in the statement. “The actual operation of the new system is highly constricted. As a result, the distortions and risks created by China’s rigid exchange rate still persist.”
Snow added that Treasury will monitor China’s progress in implementing exchange-rate flexibility in preparing the next report.
Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) introduced legislation this year that calls for a 27.5 percent tariff on all Chinese imports if the country does not reform its currency policies by a certain time period.
The senators announced this month they would delay for a second time the deadline for a vote on their bill until Dec. 23. They agreed to a postponement in June after meeting with Snow and Federal Reserve Board chairman Alan Greenspan and receiving assurances that China was taking steps toward a more flexible fiscal policy.
“The Chinese manipulate their currency and the administration should not have ducked the issue,” Schumer said in a statement. “The first step in getting the Chinese to play fairly is for the administration to be straight with the American people and say what they’ve said before — China manipulates its currency. Their refusal to acknowledge reality and take the necessary corrective action hurts every American.”