The Bush administration expects China will continue to move toward greater currency flexibility even though the steps taken so far have been small, a top Treasury Department (search) official says.
Tim Adams, Treasury's undersecretary for international affairs, said China (search) probably has done enough to avoid being branded a currency manipulator when Treasury issues its next review in October.
Adams noted that in its April report, Treasury had warned that China likely would be targeted as a currency manipulator in the next review unless there was a substantial change in current trends.
"I think you have to argue that the change in currency regime is a significant step and one of which is the beginning of a long-term process which I think is appreciated in this building and is probably appreciated more on the Hill than many want to admit," Adams told reporters on Monday, referring to lawmakers.
China announced in July that it was abandoning a currency regime which had pegged its currency, the yuan (search), at a value of around 8.28 to the dollar for the past decade. It allowed an immediate upward revaluation of 2.1 percent but the next week the Chinese central bank announced that this move was not the beginning of a series of upward movements in the yuan's value.
That sparked a warning from Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., that they would push for a vote on their bill to slap 27.5 percent tariffs on Chinese imports unless China allows its currency to appreciate further.
American manufacturers contend the currency needs to rise by as much as 40 percent to correct what they see as an unlawful trade practice of keeping the currency undervalued to gain unfair trade advantages. An undervalued yuan makes China's goods cheaper in the U.S. market and U.S. products more expensive in China.
Adams said believed the comments by the Chinese central bank was an effort to make sure that currency speculators did not start to place heavy bets on a rising value for the yuan.
"They have to measure expectations and speculative pressures and I also think they are going through a period of self-education about how the system works," he said.
Adams said as the Chinese become more confident with managing a currency against a marketbasket of other currencies rather than keeping it tightly pegged to the dollar, they will in time allow for greater flexibility.
"I have no doubt that we are in a different system that will move ever closer to what we have advised them to do and what they themselves have said they want to do, which is ultimately move to a fully floating system with open capital markets," Adams said.
Adams predicted that he and Deputy Treasury Secretary Robert Kimmitt would be making a number of trips to China to confer with Chinese officials over the currency issue in the coming months.
The administration has toughened its approach to Chinese trade issues under growing pressure from Congress, which is unhappy with a U.S. trade deficit with China that hit a record of $162 billion last year and will be even higher this year.