The US administration on Monday resisted pressure from manufacturers and prominent voices on Capitol Hill by refusing to brand China as a currency manipulator, a stance that could revive legislative efforts to introduce sanctions against Beijing.

The Treasury, in a semi-annual report required by Congress, said that while China’s rigid exchange rate continued to create distortions and risks in the global economy, Beijing had taken important steps towards introducing flexibility.

“The initial steps by China to increase exchange rate flexibility played an important part in this decision,” said John Snow, Treasury secretary, noting in particular China’s formal abandonment on July 21 of its peg to the US dollar. But he added: “It is imperative that China move towards greater flexibility as quickly as possible.”

Since China renounced the peg, the renminbi has risen just 2 per cent against the dollar and Beijing has refused to test a trading band that could in theory allow for much faster appreciation.

Monday’s decision touched off an angry response from members of Congress who had been pressing for a bigger revaluation of the renminbi and had expected action following tough language in the last Treasury report, issued in May.

“The Chinese manipulate their currency and the administration should not have ducked the issue,” said Senator Chuck Schumer, a New York Democrat who has introduced legislation to slap a 27.5 per cent tariff on all Chinese imports if Beijing does not revalue its currency.

The report, required since 1988, has become a symbolic battlefield between supporters of the administration’s cautious financial diplomacy with China and those, led by domestic manufacturing companies, that believe Beijing would move faster if threatened with punitive sanctions.

Treasury officials think China is headed in the right direction and that there is no viable alternative to negotiation. They are therefore prepared to show patience as long as China’s political leadership continues to demonstrate commitment to greater currency flexibility.

“It is because of this commitment …that we have decided not to designate at this time,” said Tim Adams, Treasury undersecretary for international affairs. “This report assumes China will indeed do what it says it is going to do.”

While designation would require nothing more than negotiations with the Chinese – which are already under way – the US has not branded any country a currency manipulator since 1994. US officials fear naming of China would be seen as highly confrontational and a signal to Congress to move ahead with protectionist legislation.

The question is whether a weakened President George W. Bush is now capable of fending off such legislative action. Mr Schumer said last week he was prepared to delay consideration of his bill until next year, but his proposal commands strong Senate support.

A more viable alternative may be legislation in the House of Representatives, which already has support of more than one-third of the lawmakers there, that would allow US companies to seek import tariffs against Chinese goods if they believed such goods were unfairly priced because of the weak renminbi.

The Treasury tried to defuse some of the pressure by releasing a technical annex showing that, while there is no consensus on what constitutes “currency manipulation”, by most measures there are several other countries that are worse offenders than China.

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