China's yuan currency remains substantially undervalued and should be permitted to appreciate more rapidly but there isn't enough evidence to conclude that Beijing deliberately manipulates its value, the U.S. Treasury department said on Friday.

In a long-delayed semiannual report to Congress that was due last October, Treasury concluded China's action so far in moving to a more flexible currency is insufficient and that more rapid progress is needed.

Treasury noted that since June 2010, when Beijing said it would allow more flexibility in permitting markets to set currency rates, the yuan had risen about 3.7 percent against the U.S. dollar as of January 27. That amounted to about 6 percent a year in nominal terms.

It is in China's interest to allow the nominal exchange rate to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners, Treasury said.

If it does not, China will face the risk of more rapid inflation, excessively rapid expansion of domestic credit, and upward pressure on property and equity prices, all of which could threaten future economic growth, it added.

The Treasury report was carefully calibrated to stress what it said would be benefits for China from letting its currency appreciate but also made the point that a lower-valued yuan was causing other emerging-market nations to hold off on allowing more flexibility.

The slow pace of Chinese appreciation adds to the substantial pressure now being experienced by other emerging economies that run more flexible exchange rate systems and that have already seen substantial exchange rate appreciation, Treasury said.

(Reporting by Glenn Somerville and David Lawder; Editing by James Dalgleish)

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