Forex News: US Treasury delays China Currency Report

The US Treasury is delaying by several months a report on whether China manipulates its currency, the Yuan (or RMB, as it is also known). Treasury Secretary Tim Geithner said he would delay the report, which was due out on 15 April, until after a series of high-level international meetings. He said the series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy.

While the decision may improve US relations with China it will upset some American lawmakers. The US government is under pressure from Congress to take a tougher line on China’s currency peg. A number of members of Congress believe the low Yuan is directly affecting the US economy.

Branding China as a currency manipulator at this stage could set off a chain of events which could eventually result in unilateral US sanctions against Chinese products and could damage relations between the two countries. Geithner faces demands from Congress to label China a currency manipulator for keeping the value of the Yuan at about RMB 6.83 to the US Dollar for almost two years, which many in the US believe gives Chinese exporters an unfair advantage.

China has to keep buying US Dollars to keep its currency from strengthening and consequently is the world’s largest foreign owner of US Treasuries, with holdings valued at $889 billion as of January this year. These investments would lose value as the US Dollar weakens and inflation in the US rises. A stronger Yuan could help slow the buildup of reserves and lower import prices, easing inflationary pressures within China. People’s Bank of China Governor Zhou Xiaochuan said last month that the nation will “sooner or later” exit its anti-crisis policies.

Mr. Geithner justified pushing back his report to the US Congress by saying he would use upcoming events, including a G20 meeting and a US-China summit, to try to encourage the communist superpower to change its currency position. Chinese President Hu Jintao is due in Washington later this month for a nuclear summit.

Jiang Yu, a spokeswoman for the Chinese foreign ministry, said at a briefing in Beijing earlier today that the Yuan’s exchange rate is not the cause of China’s trade imbalance with the US, “consequently, an appreciation of the Yuan will not solve the issue. China never benefited from the US- China trade through manipulation of its currency.”

Financial markets (forex) in Hong Kong will open tomorrow for the first time since April 1st, while China’s were shut yesterday, owing to holidays. Meanwhile Yuan futures traded near the strongest level in 11 weeks on speculation the US decision to delay the report will make China more willing to let the currency resume appreciation in the future.