[Washington] The US Treasury said on Wednesday that China does not manipulate its currency, but pushed Beijing to do more to focus on domestic demand - not exports - to drive economic growth.
In a twice-yearly report to Congress, which would set sanctions on any country officially branded a "manipulator," the Treasury said the yuan, or renminbi (RMB), had "partially recovered" from a sharp plunge earlier in the year and had appreciated by 1.9 per cent since late April.
However, the yuan remained "significantly undervalued," the Treasury said, reiterating the description it has long used in pressing China to allow its currency to move toward a market-determined exchange rate.
The Treasury has consistently decided to not brand China a currency manipulator, which could lead Congress to impose sanctions on the world's second-largest economy and top holder of US debt.
But President Barack Obama's administration, lawmakers and manufacturers have long criticised China, alleging it keeps the yuan undervalued to support cheap exports, gaining an unfair trade advantage that has ballooned the US trade deficit.
"In China, the gradual appreciation of the RMB this summer and low apparent levels of intervention indicate some renewed willingness by the authorities to allow a stronger domestic currency and to reduce intervention in line with Strategic & Economic Dialogue commitments," the Treasury said in a statement.
"Even so, important metrics continue to indicate that the RMB exchange rate remains significantly undervalued, highlighting the need for sustained progress toward a market-determined exchange rate."
The Treasury said the yuan gradually appreciated in July and August amid low intervention "and strong FX inflows also indicates renewed willingness by authorities to allow the exchange rate to strengthen." The nominal effective exchange rate has appreciated 1.6 percent in the year-through September 30, it said. The yuan was 1.4 per cent weaker against the dollar in that period.
At the end of June 2014, China's total holdings of foreign-exchange reserves reached nearly US$4 trillion, or about 40 per cent of China's gross domestic product.
"This is well beyond established benchmarks of reserve adequacy, and it is very much in China's interest to fulfill its own commitment to move more rapidly to a market-determined exchange rate, with intervention only in the case of disorderly market conditions."
The Treasury also pointed to South Korea's market intervention with the official aim of smoothing won volatility. Exports accounted for all of the country's 2.9 per cent annualized growth in the first half of 2014, "highlighting the economy's continued dependence on external demand." The won depreciated one percent against the dollar in the year through mid-October and on a real effective basis, the won appreciated 3.9 per cent through August, it said.
"Allowing for exchange rate appreciation in response to market forces would help rebalancing, as it would encourage reallocation of production resources to the non-tradables sector, which includes most services," the report said.
"Given Korea's sizeable current account surplus, substantial reserves, and undervalued currency, the won should be allowed to continue to appreciate." AFP