In its seminal annual report on international economy and exchange rate sent to the Congress, the Department of Treasury said that China can't be branded as currency manipulator.
"Treasury believes that progress thus far is insufficient and that more rapid progress is needed. Treasury will continue to closely monitor the pace of RMB appreciation by China," it said on Friday.
Based on the ongoing appreciation of the renminbi against the dollar since June 2010, China's public statements asserting that it will continue to promote RMB exchange rate flexibility, China's recent policy commitments through the G-20 and the US-China Strategic and Economic Dialogue to address external imbalances, Treasury has concluded it is not a currency manipulator, the report said.
After a period of roughly two years in which the Chinese renminbi (RMB) was pegged to the US dollar, Chinese authorities decided in June 2010 to allow the exchange rate to appreciate in response to market forces, it added.
"Since the June announcement, the RMB has appreciated by a total of 5.1 per cent against the dollar through the end of April 2011, or at a rate of approximately six per cent per year in nominal terms.
Because inflation in China is higher than it is in the United States, the RMB has been appreciating more rapidly against the dollar on a real inflation adjusted basis, at a rate of around nine per cent per year," the report said.
"A more rapid pace of nominal appreciation would enable China to achieve the needed adjustment in the real value of its currency, while simultaneously reducing inflationary pressures in its economy," it further said.
The treasury said, "China's consistent, large reserve accumulation prolongs a substantial undervaluation and hampers progress toward global re-balancing. It is in China's interest to allow the nominal exchange rate to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners".
If it does not, China will face the risk of more rapid inflation, excessively rapid expansion of domestic credit, and upward pressure on property and equity prices, all of which could threaten future economic growth, it cautioned.
"And it places an undue burden of adjustment on other emerging market economies that maintain more flexible exchange rate systems and that have already seen substantial exchange rate appreciation," the report added.
