US Treasury softens stance on China's exchange rate policy

WASHINGTON - The US 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, was "significant undervalued." Instead, the Treasury said the renminbi "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 US 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 renminbi 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 renminbi was included in the basket, which currently includes the US dollar, Japanese yen, British pound and the euro.

Earlier this year, the IMF said the substantial real effective appreciation of the renminbi 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 renminbi depreciated 2.3 percent against the dollar between Aug 11 and Sept 30. Since June 2010, the renminbi has appreciated nearly 30 percent, the report said.

While the near-term trajectory of the renminbi is difficult to assess "given economic uncertainties, volatile capital flows, and prospects for slower growth in China", the Treasury believed the fundamental factors for renminbi 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.