Yuan: US Sees Some Yuan Flexibility, Wants More - CNBC

China is starting to let its yuan currency rise more rapidly to curb inflation but needs to move even more swiftly toward a market-driven exchange rate, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

Speaking ahead of top-level talks with Chinese officials in Washington next week, Geithner also said Beijing should stop favoring its giant state-owned enterprises by keeping their borrowing costs low and warned it may face a protectionist backlash if it does not do so.

Geithner and Secretary of State Hillary Clinton co-chair two days of talks next Monday and Tuesday with China's Vice Premier Wang Qishan and State Councilor Dai Bingguo.

The once-a-year Strategic and Economic Dialogue covers various economic and diplomatic issues but currency tensions are always on the agenda. U.S. manufacturers complain China's managed yuan gives its producers an unfair trade advantage.

Geithner said the yuan [CNY= 6.4955 -0.001 (-0.02%) ] has risen about five percent against the dollar since last June when Beijing loosened a peg on its value and suggested that China's knowledge that it must let it rise more to fight inflation was to U.S. advantage.

"Fundamental forces are now operating in an overwhelming direction of encouraging China to to let the exchange rate move more rapidly in response to market forces," he told the U.S.-China Business Council. "If they don't do there is greater risk that inflation accelerates."

Inflation Spur

In the past, Beijing has resisted U.S. pressure on the yuan, arguing that too fast a rise in its currency could upset economic stability. Geithner suggested China needs to reassess that policy.

"There are risks in gradualism, not just risks in moving, and China has to figure out how to balance those risks," he said.

China's central bank guided the yuan up by 0.9 percent against the dollar in April compared with 0.4 percent in March, accelerating its appreciation as the dollar fell to three-year lows against a basket of currencies.

The U.S. Treasury was scheduled to issue a semi-annual report on April 15 on the currency practices of U.S. trade partners that, in theory, could have labeled China a foreign exchange manipulator.

It has been delayed indefinitely and it is likely the Obama administration will opt for continued verbal persuasion but avoid harsher actions such as saying that China deliberately keeps the yuan undervalued to gain a trade edge.

"Our judgment is that it would be better for the world, more fair for us and I think in China's interest to let the exchange rate appreciate more rapidly than they've been doing," Geithner said. "Hopefully they'll make that same judgment and feel more confident now as they see inflation accelerating."

Geithner took aim at China's practice of fostering so-called "national champions" among its industrial sector — essentially state-owned companies that compete globally.

By controlling bank deposit and loan rates, China effectively channels low-cost loans to state-owned enterprises, known as SOEs, and gives them an advantage over both domestic and private firms.

"The financial distortions that give preferential advantages to SOEs add to trade tension and to calls for protection among China's trade partners," Geithner said.

U.S. Undersecretary of State Robert Hormats also blasted China for pumping up the ability of state-owned companies to a receptive audience at the U.S. Chamber of Commerce, a frequent critic of Chinese currency and trade practices.

He said 41 Chinese state-owned enterprises made the 2010 list of the 500 biggest companies in the world, and three made the top 100.

"It's imperative that our companies have a level playing field on which to compete, not just in China but around the world," Hormats said. He added the United States would press in both bilateral and multilateral forums for rules establishing a "competitively neutral environment" for state-owned enterprises in China.