Report: China's currency undervalued, Germany can boost Europe's growth

The Obama administration said Wednesday that China has made strides in recent months to let its currency appreciate but that the yuan is still deeply undervalued.

The Treasury Department said China’s yuan — also known as the renminbi, or RMB — “remains significantly undervalued," but didn’t go as far as to name China or any other nation a currency manipulator in its semiannual report to Congress.

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"China should allow the market to play a greater role in determining the exchange rate," the Treasury report said.

Between mid-February and late April, the RMB depreciated by 3.1 percent.

Since late April, the yuan has partially recovered, appreciating by 1.9 percent.

Still, through mid-September, the RMB has depreciated by 1.4 percent against the dollar after strengthening 2.9 percent in 2013.

"The gradual appreciation of the RMB in July and August and low apparent levels of intervention indicates some renewed willingness by the authorities to allow a stronger domestic currency and to reduce intervention in line with Strategic & Economic Dialogue (S&ED) commitments," Treasury said.

"A stronger RMB would support domestic consumption by increasing the purchasing power of households, and encourage a shift from tradable goods production to production of domestically oriented goods and services."

During the S&ED in Beijing in July, China, for the first time, pledged to “reduce foreign exchange intervention as conditions permit.”

China also announced it was making preparations to follow international standards for reporting foreign exchange reserves as well as other economic data.

"This is an important step toward increasing transparency of China’s foreign exchange market intervention and movement to a market-determined exchange rate," the report said.

Many congressional lawmakers and business groups have argued that China's currency policies have led to a large global trade imbalance that has cost U.S. jobs.

The U.S.-China bilateral trade deficit was $152 billion in the first half of the year, slightly more than half of last year’s total, the report said. 

“The decision by the Treasury Department to avoid naming China and Japan as currency manipulators sends a clear signal to our trade partners that the welcome mat is out for mercantilism," said Scott Paul, president of the Alliance for American Manufacturing.

"While Treasury acknowledged undervaluation leading up to this report, its words ring hollow without follow-through."

In the report, Treasury turned its attention to Germany’s economic policies, arguing that there is too great a reliance on exports instead of seeking ways to create greater domestic demand that would boost economic growth across Europe.

"Europe faces the risk of a prolonged period of substantially below-target inflation or outright deflation," Treasury said.

The report said that steps to increase domestic demand in countries like Germany "can help further European and global rebalancing."

Treasury noted that Germany’s recent agreement to implement the country’s first economy-wide minimum wage represents progress toward this goal.