US avoids labeling China 'manipulator,' highlights currency risks

WASHINGTON (AFP) - China is not intentionally manipulating its currency to gain an unfair trade advantage but its massive buildup of foreign reserves raises risks for the global economy, a US government report said Wednesday.

In a much-anticipated semiannual report, the Treasury stopped short of labeling Beijing a currency manipulator, which could trigger sanctions under US law.

But the report said China's buildup of reserves is flooding the country with liquidity and raising risks of a "boom-bust" cycle that may harm the global economy.

The report was unlikely to dampen the efforts by some in the US Congress to take action against China for what many see as maintaining an undervalued currency, the yuan.

The report said that despite "heavy foreign exchange market intervention" by Beijing, US authorities concluded that even though the yuan is undervalued, "China did not meet the technical requirements for designation" as a currency manipulator.

It said US officials were "unable to determine" if the exchange rate policies were "carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade."

Nonetheless, the report had harsh comments for Chinese authorities, saying that further exchange rate flexibility "is a matter of international interest and responsibility, with critical implications for the smooth functioning of the world's trading system and the adjustment of global imbalances."

The report said China's intervention has led to a huge buildup of currency reserves that is flooding the rapidly expanding Asian powerhouse. This raises the likelihood of economic overheating and asset "bubbles," according to the report.

It said the country is awash in liquidity that is is leading to low interest rates and industrial overcapacity, a surge that could end in a "hard landing."

"These trends clearly increase the risk of renewed boom-bust cycle, which would be quite harmful for the global economy," the report said.

China's undervalued yuan against the US dollar makes US-bound exports cheaper, leading to the loss of about three million American manufacturing jobs and a record-high US trade deficit, at 232.5 billion dollars last year, and has undermined overall US competitiveness, critics of China say.

Despite a growing outcry among some US lawmakers, the Treasury in recent years has stopped short of labeling China a currency manipulator. But some members of Congress are pressing for tougher laws, and one group of legislators was planning to propose a measure to step up pressure on China, which could provoke retaliation by Beijing.

A group of lawmakers were set to propose legislation later Wednesday that would tighten the definition of currency manipulation and spell out a "clear process" for actions to be taken if a country is found to manipulate its currency.

Branding China a manipulator would compel the United States to introduce formal procedures to negotiate with China over the yuan's exchange rate, which some US experts say is undervalued by up to 40 percent.

Beijing has warned of repercussions if any legislation imposes penalties on China over its currency.

"If this happens then the Chinese departments concerned will make a response," Chinese foreign ministry spokesman Qin Gang said in Beijing this week.