U.S. Treasury Secretary Timothy Geithner said it would help global economies if China allows its “substantially undervalued” currency to strengthen.
“It would be better for the world, more fair to us, and we think in China’s interests, to let the exchange rate appreciate more rapidly,” Geithner said at an event held by the U.S.-China Business Council in Washington Tuesday.
China’s yuan retreated from a 17-year high Tuesday after manufacturing growth eased last month. The currency touched 6.4892 versus the dollar on April 29, the strongest level since the country unified official and market exchange rates at the end of 1993.
China’s currency remains “substantially undervalued,” Geithner said in the prepared version of his remarks released by the Treasury Department. “China needs to let the exchange rate adjust at a faster pace to correct that undervaluation.”
The yuan has gained more than 5 percent against the dollar since June and at an annual rate of about 10 percent if China’s inflation is taken into account.
A faster strengthening of the yuan would help lower inflation in China, Geithner said. “It will reduce pressure on emerging economies that have open capital markets and allow their exchange rates to adjust. And a stronger Chinese exchange rate will raise the incomes and spending of Chinese households, and it will encourage Chinese firms to produce for the domestic market,” he said.
Inflation in China was an annual 5.4 percent in March, exceeding the government’s full-year target of 4 percent for a third month.
The Treasury said last month it would delay its twice-yearly report on foreign-exchange markets until after U.S.-China talks May 9-10 in Washington. The meetings will include Geithner, Secretary of State Hillary Clinton, Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo.
In February, the Treasury declined to brand China a currency manipulator while saying China had made “insufficient” progress on allowing the yuan to rise. The Obama administration and U.S. lawmakers say China’s currency policy gives the nation’s exporters an unfair competitive advantage.
“China’s challenges are formidable,” Geithner said during the business council event. “China is still at the very early stage of moving from a state-dominated economy to the more flexible market economy that’s going to be essential for them to grow in the future.”
The U.S. and China will have “the most important economic relationship in the world, and we’re trying to take a long-term perspective,” Geithner said. “We’re trying to build a foundation, something that’s going to work for both of us and for the world economy over the next decade, the next 25 years.”
China’s central bank said Tuesday controlling inflation is its top priority, even after a manufacturing survey indicated that growth may slow in the second-biggest economy.
“Stabilizing prices and managing inflation expectations are critical,” the People’s Bank of China said in a first-quarter monetary policy report published on its website. Bank reserve requirements have no “absolute ceiling,” the report said, restating an April 16 comment from Governor Zhou Xiaochuan.
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