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Last Updated: Tuesday, 17 May, 2005, 22:10 GMT 23:10 UK
US ups ante over Chinese currency
Man holding yuan notes
China has so far resisted pressure to adjust its exchange rate
The United States has warned China that its exchange rate policies are "highly distortionary" and it could soon be accused of manipulating its currency.

The comments, in a report by the US Treasury Department, mark the fiercest rebuke to date in a simmering row over the value of the Chinese yuan.

The US says the yuan - which is pegged to the US dollar - is undervalued, giving Chinese firms a major advantage.

Chinese officials have ruled out upping the yuan's value for the time being.

'Economic risk'

The currency has traded in a narrow band to the US dollar since 1994.

US critics claim its value is 40% lower than it should be and that this seriously disadvantages US firms by making Chinese exports cheaper.

In a twice-yearly report on the currency practices of its trading partners, the US Treasury Department said China was in danger of being censored for manipulating its currency if it did not free up its exchange rates.

While China's ten year long pegged currency regime may have at times contributed to stability, it no longer does
United States Treasury

While stopping short of accusing China of unfair currency practices, it urged the Chinese government to move "without delay" to make the yuan more flexible.

"While China's ten year long pegged currency regime may have at times contributed to stability, it no longer does so," the report said.

"Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and its global economic growth."

However, at a press conference later on Tuesday US Treasury Secretary John Snow emphasised that the US government was not calling for an immediate free flotation of the yuan.

"This would be a mistake at this time," he said. "China's banking sector is not prepared."

Patience

Many US politicians believe that an artificially low value for the yuan has fuelled America's trade deficit with China, which rose to $162bn last year.

China has also come under pressure from other Asian countries including Japan to adjust its currency system.

In response, Beijing has urged patience, arguing that it needs to reform its banking systems before it will countenance such a move.

Earlier this month the head of the Chinese central bank refuted a suggestion in the state newspaper, the People's Daily, that the value of the yuan would soon be increased.




SEE ALSO:
China's yuan under fresh pressure
01 Jun 05 |  Business
China denies currency rise rumour
13 May 05 |  Business
Yuan adjustment talk 'groundless'
13 Oct 04 |  Business


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