U.S. political rhetoric to stay as China widens yuan band

WASHINGTON (Reuters) - China's widening of the yuan's trading band will do little to blunt criticism of its currency policy by the United States and the Treasury Department said on Sunday more progress was needed to correct a "misalignment" of the exchange rate.

Not much shift in the political rhetoric from Washington was expected in the wake of China's milestone move on Saturday to allow the yuan to rise or fall 1 percent from a mid-point every day, effective Monday, from its previous 0.5 percent limit.

"While we welcome the progress to date, the process of correcting the misalignment of China's exchange rate remains incomplete, and further progress is needed," the Treasury said.

The United States has been pressing China for most of the past decade to let its yuan currency rise in value, arguing it was necessary to help rebalance the global economy by slowing the growth of China's huge trade surpluses.

China's trade deficit with the United States set an annual record of more than $295 billion in 2011. Analysts said this and Beijing's lack of respect for intellectual property would remain major sources of contention in the relationship between the two economic powerhouses.

"It won't eliminate the exchange rate as an issue and there are a number of other sore points in U.S.-China economic relations, such as theft of intellectual property. There is still going to be tension," said Derek Scissors, a senior fellow at the Heritage Foundation.

Analysts also said it was unclear whether Beijing would fully implement the measure that will give banks and companies the most space to speculate on the yuan since China established its foreign exchange market in 1994.


"The important thing to remember is the government is still intervening very heavily in the market," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. "It added roughly $100 billion to its foreign exchange reserves in the first quarter."

Late on Friday, Treasury said it was delaying a semiannual report to Congress that was due on April 15 that assesses currency practices of key trading partners including China.

Treasury said it will not issue the report, which in theory can label countries as manipulators and make them subject to trade actions, until after a series of upcoming meetings, including a Group of 20 finance ministers' session in Washington next week.

"Over and over again they have made announcements like this. We haven't seen results. If the currency doesn't move and our trade deficit persists, we still have a problem," said Peter Morici, a professor at the University of Maryland.

Republican presidential candidate Mitt Romney said he was looking at ways to heighten pressure on China over what he considered to be currency manipulation and unfair subsidies by Beijing, according to advisers. His stance was unlikely to change much.

The Chinese currency has risen 31 percent against the dollar over the past seven years and some economists say the criticism of China's exchange policy is out of touch with reality.

They warned that Saturday's move by Beijing could actually result in the yuan depreciating against the dollar, given China's slowing growth pace and eroding trade surplus.

"This is one of those aspects which is in the category of be careful what you wish for," said Jeffrey Frankel, an economics professor at Harvard.

"You could have a depreciation of the Renminbi. The Chinese trade surplus is much diminished, there has been some months where the overall balance of payments has been in deficit rather than in surplus."

China's current account surplus, the broadest measure of its trade with the world, fell by almost one half in 2011 to $155 billion -- well below the 4 percent of GDP level considered to be a benchmark for a balanced external account. That is a big move down from its peak above 10 percent in 2007.

If the increase in flexibility resulted in a weaker yuan, that would illustrate in more concrete ways that the Chinese currency was no longer substantially undervalued, Frankel said, which could force the United States to change its language on China.

China is the world's second-largest economy after surging ahead by double-digit rates for years but it is now decelerating, a development that has fanned fears about the durability of global growth.

In the first quarter this year, the economy expanded at an 8.1 percent rate -- robust by any other country's standards but barely enough in China's case to provide jobs for its burgeoning population. It was the Chinese economy's weakest growth rate in three years.

(Reporting By Lucia Mutikani, additional reporting by Glenn Somerville, Rachelle Younglai, Susan Cornwell and Doug Palmer; Editing by Maureen Bavdek)

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