US Treasury drops view of yuan being 'significantly undervalued'

The US Treasury has dropped its view that the mainland's currency is "significantly undervalued" while saying the forces driving appreciation in the longer term remain and that Beijing needs to allow such strengthening eventually.

The yuan remains "below its appropriate medium-term valuation", the department said in its semi-annual report on foreign-exchange policies. The "core factors" that had driven the yuan's appreciation in recent years remained in place, such as a large and growing current-account surplus, and net inflows of foreign direct investment, it said.

Even so, the department refrained from characterising the currency as "significantly undervalued", as it had in each foreign-exchange report since May 2012.

The Treasury also recognised that with an economic slowdown and stock market volatility, market factors were exerting "downward pressure" on the yuan, though the department called the trend "transitory". The International Monetary Fund, by contrast, adopted the view in May that the yuan was "no longer undervalued".

The softer US stance on China's exchange-rate policy came in the first currency report by the Barack Obama administration since the People's Bank of China surprised markets on August 11 with a devaluation that led to the yuan's steepest two-day drop since 1994. The central bank said it would allow market forces to play a greater role in its daily setting of the yuan's reference rate.