China as a currency manipulator

The Chinese yuan surged to its highest level against the U.S. dollar for the third day in a row on Wednesday amid signs of Washington refraining from tagging China as a currency manipulator.

On Tuesday, the U.S. Treasury declared that the yuan is still significantly undervalued, but stopped short of saying China manipulates its currency.

According to the central People’s Bank of China, the yuan’s central parity rate was set at 6.3146 yuan against the greenback, its highest level since July 21, 2005, when China abandoned a decade-old peg against the greenback and shifted to a managed floating exchange rate.

The rate hit its previous record high of 6.3152 yuan on Tuesday.

The U.S. has argued that China artificially lowers the value of the yuan, giving its exporters an unfair advantage in overseas markets. China has continuously resisted such arguments.

“The real exchange rate of the renminbi is persistently misaligned and remains substantially undervalued, though the degree of this undervaluation appears to have declined significantly,” the Treasury said in a semi-annual report to the U.S. Congress. Renminbi is the official name of the Chinese currency.

“Treasury will closely monitor the pace of appreciation and press for policy changes that yield greater exchange rate flexibility, a level playing field, and a sustained shift to domestic demand-led growth.”

Many market watchers expect China will allow the yuan to appreciate for a while, as the world’s No. 2 economy has recently seen growing capital outflow, largely due to global capital flight to safe havens. The quest for investment safety is attributable to the European debt crisis.

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