The Bush administration has just stopped short of officially branding China a currency manipulator.In its six-monthly report to Congress on international exchange rate policies, the treasury department includes some of its toughest language yet. But it does not yield to protectionist sentiment in congress to start taking official action against the Asian giant. In a prepared statement, the treasury secretary, John Snow, says: “We are extremely dissatisfied with the slow and disappointing pace of reform of the Chinese exchange rate regime.”* He adds that: “China’s international economic and exchange rate policies are extremely concerning.” Snow notes that the Group of Seven industrialised countries, the International Monetary Fund and the Asian Development Bank have all called on China to implement greater exchange rate flexibility. However, he says, the Chinese leadership is committed to improving currency flexibility. China, like America, recognises the need to take part in a rebalancing of the global economy. For Snow, the key is for China to back such words with action. The report acknowledge China’s move on July 21, 2005, to abandon the renminbi’s peg with the dollar (Fund Strategy, July 25, 2005, page 5). Instead, it announced a system of managed floating against a basket of currencies. But since that time, the renminbi has appreciated, if only slightly, against the dollar. Stephen Roach, chief economist at Morgan Stanley, welcomes the report as a balanced measure. “In my view, the Treasury report is a solid effort in presenting a balanced case on the so-called China problem – defending the adjustments the Chinese have made while putting considerable pressure on them to do more,” he says (Morgan Stanley, Global Economic Forum May 11, 2006). However, he warns that protectionist sentiment remains in America. “Unfortunately, it probably does not defuse the protectionist time-bomb that is still ticking in Washington,” he says. Julian Jessop, chief international economist at Capital Economics, writes that ultimately the report does not matter. “The key point is that simple economic fundamentals…point to a much weaker dollar regardless of the wordplay in the Treasury report,” he says (Global Economics Update, May 10, 2006). *See www.treasury.gov.