China Avoids 'Manipulator' Tag

A U.S. report says it should do more to free its currency.
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China has made "far too little progress" in letting its currency trade freely, but hasn't acted badly enough to violate an anti-manipulation law, the Treasury Department said Wednesday.

"The Treasury Department is unable to determine, from the evidence at hand, that China's foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in China's balance of payments or gaining China an unfair competitive advantage in international trade," the department wrote.

The report is the second consecutive close call for China in a biennial review under the Omnibus Trade and Competitiveness Act of 1988. The Bush administration has faced growing pressure at home to seek liberalization in China's currency policies, which have the effect of cheapening its exports in world markets and make U.S. goods sold in China more expensive.

If China were deemed in violation of the act, the Treasury Department would be forced to open formal negotiations toward a resolution. That didn't happen. But the report did contain a lengthy critique of China's liberalization policies, and said the situation would bear monitoring.

"This report expresses particular concern about the international economic and exchange rate policies of China and reaches the central conclusion that far too little progress has been made in introducing exchange rate flexibility for the renminbi," the report says.

According to the Treasury, China's delay in instituting exchange-rate flexibility is unjustified in light of the strength of its economy.

"China needs to move quickly to introduce exchange rate flexibility at a far faster pace than it has done to date. With a still rigid exchange rate, China lacks effective monetary policy tools to avoid the boom-bust cycles it has experienced in the past," the department warned.

Still, several developments suggest the country is making halting steps toward liberalization. They include an announcement last July that the renminbi's eight-year peg to the dollar would be lifted and replaced with a limited floating exchange-rate regime. The report also cites progress China has made in building financial infrastructure that will eventually result in a more liberal exchange regime.