The US Treasury cleared China of official accusations of currency manipulation Friday, but said progress toward allowing the yuan to appreciate was "insufficient."
In a report to Congress, the Treasury said that China, eight other countries and the eurozone had not manipulated exchange rates "for purposes of... gaining unfair competitive advantage in international trade."
"Based on the resumption of exchange rate flexibility last June and the acceleration of the pace of real bilateral appreciation over the past few months," China's behavior did not qualify under the official definition of manipulation, it said in the long-delayed report.
"Treasury's view, however, is that progress thus far is insufficient and that more rapid progress is needed."
It pledged to "continue to closely monitor the pace of appreciation" of the yuan.
In addition to China, the Treasury looked at the policies of the eurozone and eight other economies: Brazil, Britain, Canada, Japan, Mexico, South Korea, Switzerland and Taiwan. The 10 together account for about 75 percent of US trade.
"Treasury has concluded that no major trading partner of the United States met the standards" of manipulation as identified by the law "during the period covered in this report."
The Chinese currency policy has been a major irritant in bilateral relations with the world's second-largest economy, and was a key topic of discussion when President Barack Obama hosted Chinese President Hu Jintao on a state visit last month.
The United States accuses Beijing of keeping its currency undervalued, flooding the country with cheap exports and costing US jobs.
US lawmakers have pushed the Obama administration to get tough with China over the yuan.
A bill threatening sanctions to punish Beijing's currency policy is lurking in Congress, which has awaited the Treasury report since it was first supposed to appear on October 15.
China has pledged to allow the yuan to gain value, but at a measured pace so as not to destabilize its rapidly expanding economy.
The Treasury said the yuan, also called the renminbi (RMB), had appreciated 3.7 percent against the dollar between mid-June and January 27.
In fact, it added, weighing the higher rate of inflation in China, "the RMB has been appreciating more rapidly against the dollar on a real, inflation-adjusted basis, at a rate which if sustained would amount to more than 10 percent per year."
The report also said that many Chinese know a more flexible exchange regime will benefit the country, and that the nascent creation of an offshore market for the yuan, mainly in Hong Kong, represents the beginning of a shift.
But that was not enough to placate China's critics in Congress.
Democrat Max Baucus, head of the Senate Finance Committee, slammed the findings.
"China's currency practices harm ranchers, farmers, and exporters across America and around the world," the senator from the western state of Montana said in a statement.
"China has been given a free pass on its currency practices for far too long. We need to hold China and our other trading partners accountable for their actions."
Sherrod Brown, a Democratic senator from Ohio, also knocked the Treasury's conclusion and called on Congress to pass legislation on currency manipulation.
The report "both confirms and ignores the obvious: the appreciation of the yuan is completely inadequate, and it's not by accident," Brown said.
"While the administration prefers to take a diplomatic approach towards the Chinese government's unlawful practice of currency manipulation, American manufacturers and workers struggling to compete against unfairly subsidized imports can't afford to wait any longer for action," he said.
The report came a week ahead of the government's December trade balance numbers. The Commerce Department is expected to report next Friday that the US trade deficit widened to $50.0 billion from $42.6 billion in November.
China has appeared on track to beat its 2008 record trade surplus with the US. Over the first 11 months of 2010, the China trade gap was $252.4 billion, compared with $268.0 billion for all of 2008.