The Bush administration on Tuesday warned China that it must move "without delay" to overhaul its currency system or face the possibility of economic sanctions.
The warning was the administration's strongest statement yet that China must stop linking its currency, the yuan, to the weakened U.S. dollar. Critics say that peg gives the Asian nation an unfair trade advantage, adding to a massive U.S. trade deficit with China and causing the loss of thousands of American jobs.
In unusually harsh language, the Treasury Department, in a report to Congress, described China's 10-year-old exchange rate regime as "highly distortionary" and said it posed a threat to the global economy. Unless Beijing moves to a more flexible exchange rate system quickly, the report said, China is "likely" to be cited for currency manipulation, which would open the door for sanctions.
Treasury Secretary John W. Snow did not cite a deadline for China to take action. Under a 1988 law, the Treasury Department is required to analyze countries' exchange rate policies and determine whether they are manipulating them to gain unfair trade advantages. Countries found in violation can face economic penalties. The department will publish its next report in October.
Snow said the U.S. wasn't calling for an "immediate full float" because "China's banking sector is not prepared. What we are calling for is an intermediate step that ... allows for a smooth transition -- when appropriate -- to a full float."
Such an intermediate step might entail creating a range in which the yuan is allowed to float against the dollar, analysts have said. The peg now stands at 8.28 yuan to the dollar. It is expected that, if left to market forces, the yuan would rise against the dollar.
The Treasury report triggered a late-day rally on Wall Street as investors saw the statement as a compromise that wouldn't immediately escalate trade tensions with China, analysts said.
But the Bush administration's move failed to satisfy manufacturing trade groups and congressional critics, who said that enough evidence existed to label China a currency manipulator. They claim that China's currency is undervalued by as much as 40%, making Chinese products cheaper in the U.S. and other markets, giving Chinese exporters a huge advantage.
"Getting to the one-yard line doesn't put points on the board," said Frank Vargo, international trade expert at the National Assn. of Manufacturers, which called for tougher actions against China. "We need points on the board."
