U.S. Treasury softens stance on China' s exchange rate policy

The U.S. Treasury Department on Monday softened its stance on China's exchange rate policy as China had allowed market forces to play a greater role in setting the currency's exchange rate.

In its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, the Treasury dropped its previous assessment that Chinese currency yuan, also known as the renminbi (RMB), was "significant undervalued." Instead, the Treasury said the RMB "remains below its appropriate medium-term valuation".

Washington's shift tone comes after China's central bank announced on Aug. 11 to improve its central parity system, which is the starting point for daily forex trading, to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar.

"The Treasury is carefully monitoring the implementation of the new exchange rate policy approach and how it will work in practice,specifically, whether China will allow the RMB to respond to market forces for appreciation as well as for depreciation," the report said.

The International Monetary Fund (IMF) has welcomed China's move to improve its exchange rate formation mechanism, saying that a more market-oriented exchange rate would facilitate the SDR (special drawing rights) operation if the RMB was included in the basket, which currently includes the U.S. dollar, Japanese yen, British pound and the euro.

Earlier this year, the IMF said the substantial real effective appreciation of the RMB has brought the exchange rate to a level that is "no longer undervalued".

The Treasury also acknowledged that China's real effective exchange rate (REER) has appreciated by 3.6 percent in the year-to-date through September, despite the RMB depreciated 2.3 percent against the dollar between Aug. 11 and Sept. 30. Since June 2010, the RMB has appreciated nearly 30 percent, the report said.

While the near-term trajectory of the RMB is difficult to assess "given economic uncertainties, volatile capital flows, and prospects for slower growth in China", the Treasury believed the fundamental factors for RMB appreciation remain intact, including "strong external balances which include a sizeable and growing current account surplus, sharply improved terms of trade, and ongoing net inflows of foreign direct investment".

The Treasury welcomed China to subscribe to the IMF's Special Data Dissemination Standard (SDDS) in October as "a much-needed step" toward increasing the transparency of China's foreign exchange reserves and exchange rate policy.

China has also begun to report its foreign reserve portfolio to the IMF by participating in the currency composition of official foreign exchange reserves (COFER) survey, another effort to improve its data disclosure transparency, the IMF said last month.

To further increase transparency, the Treasury looks forward China to disclosing foreign exchange market intervention regularly, the report said.

Overall, the report concluded that no major trading partner of the United States, including China, has manipulated their currencies over the past six months to keep them undervalued.

The U.S. Omnibus Trade and Competitiveness Act of 1988 requires the Treasury to provide reports on whether its major trading partners manipulate the rate of exchange between their currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.

In previous such reports from the Obama administration, the U.S. government did not label China as a "currency manipulator".

The market-based RMB exchange rate reform will continue to proceed and RMB exchange rates will become more flexible and be kept basically stable at an adaptive and equilibrium level, Yi Gang, deputy governor of the People's Bank of China, said at the IMF's annual meetings in Lima earlier this month. Endi