Some American critics say that the yuan is still at least 20 per cent undervalued [Getty Images]
The US treasury department has postponed a decision on whether to accuse China formally of using its currency to gain unfair trade advantages against the US.
With the delay until after a pair of G20 meetings in November, the White House avoided a deadline on Friday that was to test already fragile US-China relations.
Labelling China a currency manipulator would enrage Beijing just as Washington is looking for their help on major global initiatives.
On the other hand, postponing the decision could damage the struggling Democratic Party in the lead-up to congressional elections on November 2.
“Democrats and Republicans alike in congress are prepared to move legislation confronting China’s currency manipulation this year,” Charles Schumer, a Democratic senator, said.
“We hope to have the administration’s support but will go forward without it if necessary.”
The controversy comes as the Chinese currency continues to rise to new highs almost every day.
By late on Friday, the yuan was at 6.64 – its strongest rate against the dollar since the government set up the current currency regime in 1993.
In his remarks at a monetary policy conference on Friday, Ben Bernanke, chairman of the US Federal Reserve, did not directly mention the currency dispute with China.
But the side-effects of minting new dollars to pay for planned treasury-asset purchases are a weaker dollar.
Obama is under pressure to punish China for trade policies that US politicians say cost millions of manufacturing jobs in their country.
Many Americans are angry over a politically sensitive US trade deficit with China that has climbed to an
all-time monthly high of $46.3bn.
The US deficit with China alone rose 8.2 per cent in August to an all-time high of $28bn, surpassing the record $27.9bn set in October 2008.
|Melissa Chan reports how China seeks to establish a domestic consumer-driven economic model.|
Speaking on Friday, Yao Jian, spokesman for China’s commerce ministry, said it was not fair to criticise his country’s exchange rate policy simply by pointing to its trade surplus.
But American manufacturers contend that an undervalued currency gives China a trade boost by making Chinese goods cheaper in the US – and US products more expensive in China.
If the US were to designate China a currency manipulator, it could trigger negotiations between the two countries and could result in US economic sanctions.
“A currency war would be very upsetting would create all kinds of unpredictabilty and slow growth,” Nick Spicer, Al Jazeera’s correspondent in Washington, said.
The Obama administration, worried about high unemployment and losing ground to opposition Republicans in the November polls, wants to look tough on China.
That is especially true after ministers from around the world left last week’s global finance meetings in Washington without resolving how to deal with differences over currency.
At the same time, US officials see Chinese co-operation as essential to US efforts to deal with the Iranian and North Korean nuclear standoffs, climate change and other difficult issues.
Many US politicians appear to have tired of White House attempts to strike a delicate balance with China.
The House of Representatives sent the administration and China a strong message last month by passing tough new legislation that would impose economic sanctions on countries found to be manipulating their currencies.
“Tensions between the US and China have been boiled down to this single issue, but this misses the point in the debate,” Alistair Thornton, an economist with IHS Global Insight, told Al Jazeera.
“The Chinese savings rate is far too high, and consumption in the US is far too high.”
Congress mandates that the treasury department prepare a twice-a-year report on whether any countries are manipulating their currencies.
Obama, following the lead of his predecessor, George Bush, has put off the report before.
The treasury delayed its April 15 report to give China more time to make currency reforms. It was eventually released on July 8.
While the Obama administration is in a diplomatic and political bind, US officials do have options other than an outright declaration that China manipulates its currency.
It could also use strong words to criticise China without making a formal declaration of currency manipulation.
US-China ties have hit a low point recently, with the countries clashing over territorial disputes in the South China and East China seas, human rights as well as Taiwan and Tibet.
In the run-up to last week’s finance meetings, Timothy Geithner, the US treasury secretary, urged China to make more progress in moving more towards flexible exchange rates.
China has allowed its currency to rise in value by about 2.3 per cent since announcing in June that it would introduce a flexible exchange rate.
Chinese officials say their gradual effort to revalue their currency is the best approach.
Allowing the currency to rise too rapidly, they say, would cost thousands of Chinese manufacturing jobs and destabilise the Chinese economy.
Differences over what exchange rates are appropriate to put the world economy back on course, have been intensifying in advance of a pair meetings of the Group of 20 leading economies in South Korea.
G20 finance ministers meet next week in Gyeongju to prepare for a summit of their leaders in Seoul on November 11-12.