Currency markets to scrutinize China exchange rate following word of greater flexibility

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Markets to scrutinize China exchange rate

BEIJING — Currency markets will closely watch Chinese exchange rates Monday to see how far Beijing will allow the yuan to rise after announcing the end of its two-year-old peg to the dollar.

A stronger yuan would make Chinese exports more expensive and bring relief to foreign manufacturers that have been struggling to compete. But Beijing plans to disappoint them, saying Sunday there will be no dramatic rise.

Beijing has long refused to allow the yuan to float and denied accusations that it is unfairly undervalued.

But the Communist leadership finally acceded to foreign pressure to increase the exchange rate’s flexibility on Saturday, a week ahead of a G-20 summit at which President Hu Jintao was likely to have been hammered by critics of the currency policy.

China, however, is still steering a path to economic recovery, and with workers at home demanding wage hikes — which would also increase the price of exports — the central bank sought to curb speculation of a major rise in the value of the yuan, also called the renminbi.

“There is at present no basis for major fluctuation or change in the renminbi exchange rate,” the People’s Bank of China said in a lengthy commentary Sunday on its decision a day earlier.

The statement implied that China considers the current exchange rate to be roughly where it ought to be, and economists said they don’t anticipate big swings in the yuan’s value.

Keeping it at a “reasonable, balanced level” would contribute to economic stability and help restructure the Chinese economy to put greater emphasis on services and domestic consumption instead of exports, the statement said.

It said China will rely more on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone.

China allowed the yuan to rise by about 20 percent beginning in 2005, but halted that two years ago to help Chinese manufacturers weather the global financial crisis.

Since then, the yuan’s value has been pegged to the dollar at an exchange rate of roughly 6.83 to $1. The government sets the rate each day before the start of trading and retains powerful tools to control its movement.

Any sudden rise in the yuan could ruin businesses already operating on razor-thin margins and cost job losses. It could also drive down the value of China’s $2.4 trillion in foreign exchange reserves.

Because of China’s large trade surpluses, the central bank intervenes heavily in the exchange market, buying up excess foreign exchange earnings to keep the yuan’s value from rising.

Although it mentioned few specific steps and set no targets, Saturday’s announcement generally won praise overseas — along with some criticism.

President Barack Obama said the move would help protect the economic recovery, while the European Commission said it would benefit “both the Chinese economy and the global economy.”

But with China’s economy growing at double-digit rates, boosted by 4 trillion yuan ($586 billion) in stimulus spending and record bank lending to finance construction projects, Beijing can afford to move faster, some say.

“Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” U.S. Sen. Charles Schumer, a New York Democrat, said Sunday, adding he plans to move forward with a bill that would punish Beijing for its currency policies.

“It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America as a result of unfair trade policies,” he said in a statement.

Some Chinese experts criticized Saturday’s announcement as a cave-in to foreign pressure that would ultimately damage China’s crucial export sector.

“From an economic angle, the appreciation of the renminbi will have a definite effect on exports, but in terms of politics and macroeconomic policy, it can be seen as a result of the need for balance,” said Zhao Xijun, deputy dean of the School of Finance of Renmin University.

Also writing on the website of the National Business Daily, a leading business newspaper, economist Ye Tan said the move would pile pressure on exporters already contending with a roughly 15 percent appreciation of the renminbi against the euro, as well as rising labor costs.

“China’s exports are unstable and this is having a major impact on the actual economy,” Ye wrote. “Appreciation of the renminbi needs to wait until economic readjustment is certain and China’s domestic demand has truly expanded.”

Online:

www.pbc.gov.cn/