Yuan significantly undervalued: US report warns China against interference

Washington: The Chinese currency “remains significantly undervalued”, a new US report has said, warning China to stop “frequent interventions” in the currency markets and move towards a market-determined exchange rate.

“Important metrics continue to indicate that the RMB exchange rate remains significantly undervalued, highlighting the need for sustained progress toward a market-determined exchange rate,” the US Treasury Department said on Wednesdayin its semi-annual report to Congress on International Economic and Exchange Rate Policies.

[caption id=“attachment_105163” align=“alignleft” width=“300”]  Reuters image[/caption]

The report, warns China to stop its “frequent interventions” in the currency market and allow its currency, RMB or Yuan, to rise in value against the dollar. “This includes refraining from intervention within the band and adjusting the reference rate if market pressures push the exchange rate to the edge of the band,” it said.

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“We will continue to monitor these issues closely going forward,” the report said, adding, “China should disclose foreign exchange market intervention regularly to increase the credibility of its monetary policy framework and to promote exchange rate and financial market transparency,” it said.

China started intervening in currency exchange markets in February this year, leading to RMB’s depreciation by 3.1 percent. Since late April, it has partially recovered, appreciating by 1.9 per cent. On balance, in the first nine and a half months of 2014, the RMB has depreciated by 1.4 per cent against the dollar, it added.

The undervalued Chinese currency, the report says, remains a significant reason for US’s trade deficit with the world’s second-biggest economy. A weaker RMB against the dollar means Chinese products will be cheaper in US, but US goods will be expensive in China.

This large trade deficit has also resulted in building up of large foreign exchange reserves in China. According to the Treasury, in June 2014, China’s total holdings of foreign exchange reserves came to almost $4 trillion, equivalent to over 40 per cent of China’s GDP.

This is well beyond established benchmarks of reserve adequacy, and it is very much in China’s interest to fulfil its own commitment to move more rapidly to a market-determined exchange rate, with intervention only in the case of disorderly market conditions, it said.

The report argues that since China plays such a major role in the global economy, there is a strong need for greater transparency of China’s foreign exchange market interventionand foreign reserves holdings.

“Two ways China could increase the transparency of its activity in the currency market, are to adhere to the IMF’s Special Data Dissemination Standard (SDDS) and to contribute to the IMF’s aggregate Currency Composition of Foreign Exchange Reserves (COFER) database,” the report said.

“The SDDS was established by the IMF to guide members in the provision of their economic and financial data to the public. It requires the public provision of timely, high quality statistics on a range of metrics. “One metric is data on international reserves, also known as the reserves template,” the report added.

PTI