PDF《Report炉o烫ongress爋n?》

2 In China, since the authorities decided in June

2010 to allow the exchange rate to appreciate in response to market forces, the renminbi (RMB) has appreciated by a total of 5.1 percent against the dollar in nominal terms through the end of April 2011, or at an annual pace of approximately 6.0 percent. Because inflation in China is significantly higher than it is in the United States, the renminbi has appreciated more rapidly against the dollar on a real, inflation-adjusted basis, at a rate of around

9 percent per year. A more rapid pace of nominal appreciation would enable China to achieve the needed adjustment in the real value of its currency while simultaneously reducing inflationary pressures in its domestic economy. China'

s international reserves have risen by $197 billion over the first quarter of 2011. That continued rapid pace of foreign reserve accumulation in China;

the broadly unchanged level of China'

s real effective exchange rate, especially given rapid productivity growth in the traded goods sector;

and the projected widening of current account surpluses, all indicate that the real effective exchange rate of the renminbi remains substantially undervalued. It is in China'

s interest to allow the nominal exchange rate to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners. By trying to limit the pace of appreciation, China is not allowing the exchange rate to serve as a tool to counter inflation in its own economy. The policy complicates the adjustment needed for broader financial sector reform. It works against China'

s stated goal of strengthening domestic demand. And it places an undue burden of adjustment on other emerging market economies that maintain more flexible exchange rate systems and that have already seen substantial exchange rate appreciation. There has been increasing recognition of the role of exchange rate appreciation in addressing inflation in China. On April 19, People'

s Bank of China Deputy Governor Hu Xiaolian stated that China should increase exchange rate flexibility to ease imported inflation pressures, and in comments to China'

s State Council in April, Premier Wen noted that strengthening the flexibility of the exchange rate can serve as one of the tools available to control inflation. During the recent Strategic and Economic Dialogue (S&

ED), China stressed that it will continue to promote RMB exchange rate flexibility. Based on the ongoing appreciation of the renminbi against the dollar since June 2010, China'

s public statements asserting that it will continue to promote RMB exchange rate flexibility, and China'

s recent policy commitments through the G-20 and the S&

ED to address external imbalances, Treasury has concluded that the standards identified in Section

3004 of the Act during the period covered in this Report have not been met with respect to China. Treasury'

s view, however, is that progress thus far is insufficient and that more rapid progress is needed. Treasury will continue to closely monitor the pace of appreciation of the renminbi by China. We will continue to encourage China to open markets and to pursue policies that level the playing field and support a shift to domestic-demand led growth. It is a high priority for Treasury, working through the G-20, the IMF, and through direct bilateral discussions to encourage policies that will produce greater exchange rate flexibility.

3 Introduction This Report focuses on international economic and foreign exchange developments in the second half of 2010. Where pertinent and when available, data and developments through April