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Treasury Lays into China on Currency in Latest FX Report

In its annual report to Congress on international economic and exchange rate policies, the Treasury Department urged China to take greater strides in letting its currency appreciate.

Many have noted that China's renminbi (RMB) is perennially undervalued, thereby offering Chinese producers an unfair advantage in global export markets. Progress has been made, according to the Treasury, but deeper problems have yet to be addressed. "China's real effective exchange rate has exhibited persistent and substantial undervaluation, although the estimated range of misalignment has narrowed over the course of the past 18 months," said the report. "The underlying factors that distort China's economy and constrain global growth remain."

The Treasury noted that the process of appreciation remains incomplete, arguing that, given the rapid productivity growth in China's trade goods sector, the RMB should be better aligned with its actual value by now. "China's large foreign reserve accumulation has prolonged the misalignment in China's real effect exchange rate and hampered progress toward global rebalancing, including among economies that compete with China for exports," said the report.

In its assessment, the Treasury also aimed to sell the idea of currency appreciation to China. "It is in China's interest to allow the exchange rate to continue to appreciate, both against the dollar and against the currencies of its other major trading partners," said the report. "A lack of continued appreciation by China would prevent the exchange rate from serving as a tool to encourage consumption so as to maintain strong, sustainable growth, further complicate the adjustment needed for broader financial sector reform and undermine China's stated goal of strengthening domestic demand."

While Treasury noted that China's appreciation efforts have been insufficient, it made no specific threats against the country should it continue to drag its feet. "Treasury will continue to closely monitor the pace of RMB appreciation and press for policy changes that yield greater exchange rate flexibility, level the playing field and support a pronounced and sustained shift to domestic-demand led growth," said the report.

Jacob Barron, CICP, NACM staff writer