World at risk from China forex policy

China's foreign-exchange policy risks "unwinding" some of the progress made in reducing global trade imbalances during the financial crisis, the U.S. Treasury said in its latest report on foreign-exchange trading.

But the department repeated its previous finding that China was not formally manipulating its currency.

The absence of a finding of manipulation is important. Under the legislation prompting the review, a finding of manipulation would set off a series of steps that might end in the U.S. imposing duties on Chinese imports.

The U.S. said it was not pleased with Chinese foreign-exchange policy.

"The rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy," the Treasury report said.

To outside analysts, China has clearly pegged the currency to the dollar.

Carl Weinberg, chief international economist at High Frequency Economics, said the People's Bank of China has pegged the yuan at around 6.82 RMB to the dollar since July 2008.

That followed three years of steady yuan appreciation.

"The question is, how long can the PBOC continue to peg the yuan at this level, or any level,?" Weinberg asked in a recent research report.

China has amassed $2.1 trillion worth of foreign reserves, equivalent to 49% of its 2008 GDP as a result of foreign-exchange policy.

In the first half of the year, China's reserve assets increased by $186 billion, Treasury said.

"The stability of the renminbi against the dollar over the past year, the real effective depreciation that has taken place ... continuing productivity growth in the Chinese economy, and the acceleration of foreign reserve accumulation this year all suggest that the renminbi remains undervalued," the report concluded.

Treasury has been pushing China to develop its domestic market. One way to accomplish that would be to strengthen China's social safety net.

Treasury praised China for taking several "important" steps in that direction.

The countries have agreed to meet annually to review economic policies. The next meeting will be held in China next summer.

China's foreign exchange policy is also going to be an early test for the new G-20 group of countries that have agreed to cooperate on international economic issues.

The leaders of the G-20 agreed in their Pittsburgh summit to develop a process of peer reviews of their policies. The IMF was given a role to identify trends that may lead to the next bust in time to allow corrective measures to be put in place.

Because the yuan remained stable against the dollar, it followed the movement of the dollar against other currencies.

Between February and August 2009, the yuan has depreciated by 6.9%