The Bush administration declined yesterday to accuse China of manipulating its currency for competitive gain, rejecting demands from Congress and U.S. manufacturers who favor aggressively confronting Beijing over its currency practices.
In a much-awaited report, the Treasury Department described as "troubling" China's failure to allow much of a rise in the value of its currency, the yuan, against the U.S. dollar. And it warned that a continued refusal by Beijing to change its policy could draw a harsher response in the next report, due in the spring.
But as it has done repeatedly in its past semi-annual reports on foreign exchange matters, the department stopped short of branding China -- or any other major trading partner -- a currency manipulator. That represented a continuation of the administration's preference for patient diplomacy rather than confrontation with Beijing. Officials emphasized that their patience was not infinite and that their stance was based on the hope that over the next several months, Chinese authorities will implement commitments to let the yuan rise.
"This report assumes the Chinese will do what they say they are going to do," said Timothy D. Adams, the undersecretary of the Treasury for international affairs, at a news conference.
The report drew an angry response from lawmakers and industry groups that have long complained that by keeping the yuan's value at around eight per dollar, the Chinese authorities give an unfair advantage to their manufacturers in world markets.
The critics contend that China holds the exchange rate of the yuan well below the value that would be set by the forces of supply and demand in global financial markets, making already low-cost Chinese goods even cheaper.
"If it walks like a duck and quacks like a duck, it's a duck," said Sen. Charles E. Schumer (D-N.Y.) in a statement. "The administration's lack of action today hurts all Americans by refusing to acknowledge the obvious -- that China manipulates its currency."
However, Schumer did not threaten to demand a vote next month on a bill he has sponsored with Sen. Lindsey O. Graham (R-S.C.), which would slap punitive tariffs on Chinese goods unless Beijing allows the yuan to rise significantly. Some analysts have voiced fears that Congress would take matters into its own hands if the administration balked at challenging China. But Schumer's spokesman, Israel Klein, declined to specify whether his boss would force a vote, saying only, "Everything is on the table."
China did change its currency policy July 21, a move that garnered much applause in Washington. Beijing raised the value of the yuan 2.1 percent and declared that the yuan's value might rise or fall as much as 0.3 percent daily against other major currencies.
That step appeared to mark an important shift for Beijing, which had kept the yuan at 8.27 yuan per dollar for the better part of a decade -- a policy partly aimed at preventing a financial crisis and partly aimed at ensuring that exporters could continue to provide jobs for the nation's urban poor. But since the July 21 announcement, the yuan has barely budged, as Chinese officials have used their vast hoard of dollars to keep the currency stable.
Yesterday's Treasury report said that "while the new exchange rate mechanism allows for greater flexibility . . . [it] remains, in practice, a tightly managed currency peg against the U.S. dollar." The report cited recent statements by Chinese officials pledging to move toward a more flexible system and said that "future reports will intensively scrutinize whether and to what degree China is practicing what officials have repeatedly committed to undertake."
Adams declined to say exactly what China would have to do by the time the next report is issued to avoid being accused of manipulation. "I don't have a particular threshold or a particular standard in mind," he said. "I think in some ways it's kind of like obscenity -- you know it when you see it."
Under the legislation requiring the Treasury to issue the reports, a country found to be manipulating its currency is subject to consultations with the department -- hardly a stiff sanction, since Treasury officials are already in constant contact with their Chinese counterparts about the issue.
But accusing China of manipulation would be a diplomatic slap in the face, and Treasury officials made clear yesterday that they would view it as a signal to Congress that their own efforts have failed and that the time has come for legislative remedies. Administration officials strongly oppose the Schumer-Graham bill, which they regard as a violation of international trade rules, but have indicated a willingness to consider other legislation.
"We would oppose any kind of protectionist legislation. It would be met with reciprocal action" that would threaten the global trading system, Adams said, but he added, "We have certainly heard from a number of members that our designating China [as a currency manipulator] would be seen as a sign of frustration."
Reflecting a hope that international institutions will prove more effective in pressuring Beijing, the report also called on the International Monetary Fund to "intensify its efforts to promote greater flexibility in exchange rates for China."
But it did not assert that the IMF should go so far as to initiate "special consultations" with China over the currency issue, a more confrontational step. In a speech in September, Adams strongly suggested that he wanted the IMF to take such a step, but IMF Managing Director Rodrigo de Rato promptly squelched the idea, arguing that the fund staff believes China is not violating any IMF rules.