WASHINGTON (MarketWatch) -- The Bush administration has turned up the heat on China to take a concrete, large step toward a flexible exchange rate.
In its semiannual currency report released Tuesday, the Treasury Department did not make a formal finding that the Chinese government manipulated the exchange value of the yuan for export advantage.
But the report warned China that it has six months, until the next currency report is due, to move to a more flexible exchange rate or be designated as a currency manipulating country.
"If current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for designation," Treasury said.
Such a finding would trigger bilateral negotiations on the exchange rate and possible retaliatory action.
China has fixed its currency at roughly 8.3 yuan to the dollar since 1994.
American manufacturers complain that the fixed Chinese exchange rate provides unfair cost advantage to China's exports and is costing thousands of U.S. jobs.
Their concerns have found sympathetic ears in Congress, where efforts are under way to slap a tariff on Chinese imports if no change in the fixed exchange rate is made.
Treasury Secretary John Snow has slowing been increasing the tone of his rhetoric over the past year. Where he used to insist that only quiet diplomacy would get China to alter its currency peg, Snow has repeated in recent days that "now is the time" for Chinese officials to move.
At a press conference after the report was released, Snow said that the risks of China delaying a currency move are greater than any concerns of reform.
The report was scathing about China's dollar peg. It called the fixed exchange rate a danger to the global economy.
"The fixed exchange rate that China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding adjustment of international imbalances," the report concludes.
"Treasury will monitor progress on China's foreign exchange market developments very closely over the next six months in advance of preparation of the fall (currency) report," the report said.
International economists have generally come to expect China to alter its currency peg sometime this year, but believe that the adjustment may only be a small symbolic step by as little as 5%.
The Treasury report seems to anticipate such a move.
"It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," the report said.
Not all analysts believe that China should alter its currency peg. They worry that a rise in the yuan's value could cause a spike in U.S. interest rates.
Because of strong upward pressure on the yuan, China has had to sell yuan in exchange for dollar assets, including U.S. Treasuries. This has kept U.S. interest rates low.
Greg Robb is a senior reporter for MarketWatch in Washington.
In its semiannual currency report released Tuesday, the Treasury Department did not make a formal finding that the Chinese government manipulated the exchange value of the yuan for export advantage.
But the report warned China that it has six months, until the next currency report is due, to move to a more flexible exchange rate or be designated as a currency manipulating country.
"If current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for designation," Treasury said.
Such a finding would trigger bilateral negotiations on the exchange rate and possible retaliatory action.
China has fixed its currency at roughly 8.3 yuan to the dollar since 1994.
American manufacturers complain that the fixed Chinese exchange rate provides unfair cost advantage to China's exports and is costing thousands of U.S. jobs.
Their concerns have found sympathetic ears in Congress, where efforts are under way to slap a tariff on Chinese imports if no change in the fixed exchange rate is made.
Treasury Secretary John Snow has slowing been increasing the tone of his rhetoric over the past year. Where he used to insist that only quiet diplomacy would get China to alter its currency peg, Snow has repeated in recent days that "now is the time" for Chinese officials to move.
At a press conference after the report was released, Snow said that the risks of China delaying a currency move are greater than any concerns of reform.
The report was scathing about China's dollar peg. It called the fixed exchange rate a danger to the global economy.
"The fixed exchange rate that China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding adjustment of international imbalances," the report concludes.
"Treasury will monitor progress on China's foreign exchange market developments very closely over the next six months in advance of preparation of the fall (currency) report," the report said.
International economists have generally come to expect China to alter its currency peg sometime this year, but believe that the adjustment may only be a small symbolic step by as little as 5%.
The Treasury report seems to anticipate such a move.
"It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," the report said.
Not all analysts believe that China should alter its currency peg. They worry that a rise in the yuan's value could cause a spike in U.S. interest rates.
Because of strong upward pressure on the yuan, China has had to sell yuan in exchange for dollar assets, including U.S. Treasuries. This has kept U.S. interest rates low.
Greg Robb is a senior reporter for MarketWatch in Washington.
