In a bit of diplomatic doubletalk, the Treasury Department said that China's currency is undervalued — but also said China isn't manipulating its currency.
The comments, from a semi-annual report issued yesterday, are neither entirely logical nor entirely surprising.
China's currency was pegged to the dollar from 2008 until June of this year. If it had been allowed to fluctuate, it would have appreciated significantly. That would have made U.S. goods cheaper in China, and Chinese goods more expensive in the U.S.
Since last month, when China said it would allow the yuan's value to fluctuate, the currency has appreciated against the dollar — but only a little (less than 1 percent).
The Treasury report calls China's decision to let the yuan fluctuate a "significant development." But it's not enough, the report says.
Treasury cites a number of factors — including the fact that China continues to show productivity gains and pile up foreign reserves — that suggest the yuan is still too cheap against the dollar. It will "take time before we can assess whether China's recent exchange rate change will produce a sufficiently market-determined exchange rate to correct the undervaluation," the report says.
When the yuan floated between 2005 and 2008, it appreciated against the dollar by about 20 percent, according to the WSJ.