The US administration's decision not to name China a currency manipulator is the right one, Stephen Roach, non-executive chairman for Asia at Morgan Stanley told CNBC Friday.
In a report, the US Treasury said Thursday that China's move to free the yuan from its dollar peg was significant but the Chinese currency was still undervalued. However, the report did not label China a currency manipulator.
On Friday, the yuan rose, after the Chinese central bank PBOC fixed the yuan's mid-point versus the dollar at 6.7753, slightly higher than Thursday's 6.7768.
"This is the right decision to make," Roach told CNBC.
He said China is a developing economy with a relatively underdeveloped financial system and this is why it had pegged the yuan to the world reserve currency.
The US should seek to tackle its trade balance to boost its economy instead of bashing China, he said, stressing the country's role in financing the US budget gap by buying Treasurys.
"We've got to look at why we run trade deficits with so many people? We have to save more," Roach said.
"Might (China) rethink how much they want to lend us, how will we grow?" he added.
China will change its business model over the next few years and the US should take advantage of that change, according to Roach.
"China, 30 years ago, was on the brink of failure. They adopted a model led by exports and investment in order to grow," he explained.
But now the country cannot rely on strong growth in the US and Europe to absorb its exports, and needs a big shift in its economic model to stimulate its huge domestic market, which is an opportunity for the US, Roach added.
"How about we take advantage of that opportunity to grow American exports and American jobs?" he said.
"The China that is going to evolve over the next five years… it's changing big time. And we as Americans, we've got to be on board with where China's going not where it's been," Roach said.