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Washington Post : China's Currency May Float a Little

Move Could Ease U.S. Trade Conflict

By Peter S. Goodman Washington Post Foreign Service Tuesday, July 19, 2005; D01

SHANGHAI, July 18 -- Sixty percent of China's state economists think the government should allow the country's currency to increase in value sometime this year, according to a survey compiled Monday by the National Bureau of Statistics.
The survey of 60 economists -- an internal study confirmed by two participants -- reinforced a growing consensus that sometime this summer China will adjust slightly upward the value of its currency, the renminbi, also known as the yuan, which has been pegged at about 8.28 to the dollar for about a decade.
Such a move might soothe trade tensions with the United States on one of the most bitterly contested issues between the two countries. The Bush administration has for months pressed China to allow the yuan to climb, claiming the currency's artificially low value makes Chinese goods unfairly cheap on world markets. China has maintained that it is being made the scapegoat for the loss of U.S. manufacturing jobs.
The move also might ease conflict over the attempt by the state-owned Chinese energy company Cnooc Ltd. to buy United States-based Unocal, which has provoked talk in Washington that China's economic rise threatens U.S. national security. In that debate, as in an ongoing battle over surging Chinese-made textile exports, some members of Congress and trade groups have fixed on the currency issue in arguing that China's growing might is the result of unfair trading practices.
Most of the world's major currencies -- such as the dollar, the euro and the British pound -- are allowed to "float" freely in international markets, accounting for the daily changes in their value. Since 1995, by contrast, the Chinese government has tied the value of its currency to the U.S. dollar to ensure stability, sparing investors worry about exchange rate fluctuation. During the Asian financial crisis of 1997 and 1998, when many regional currencies plummeted against the dollar, the United States and others praised China for maintaining its fixed exchange rate as a crucial source of dependability.
The economists surveyed compose an elite group with access to the senior officials who set China's policies. Some of those polled reside in research institutes attached to China's State Council, the equivalent of a governing cabinet. Others are connected to the State Development and Reform Commission, China's central planning body. Analysts said the survey results would seem to indicate that China's senior leaders are seriously considering an adjustment to the currency regime.
But most analysts also said the move would almost certainly be too small to assuage those demanding change. Congressional critics claim China's currency would need to rise by as much as 40 percent against the dollar to reach a fair level. Most economists assume China will merely widen the band within which it allows the yuan to trade, while abandoning a fixed value to the dollar in favor of a basket of currencies that would include the euro and the Japanese yen.
"China may widen the trading band but it will be a very small widening, maybe 3 percent," said He Fan, an economist at the Chinese Academy of Social Sciences in Beijing. "It's not likely for China to go for a big adjustment at one time."
Late last month, Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) agreed to postpone a scheduled vote on a bill that would impose punitive tariffs of 27.5 percent against Chinese imports if China does not substantially raise the value of the yuan. The two senators said they agreed to delay the vote only after gaining promises from Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary John W. Snow that China had conveyed assurances that a revaluation would come soon. A mere widening of the trading band could prompt a resumption of movement on the bill.
Predicting a Chinese currency move has become a perilous if popular game, with some of the world's largest investment banks making bold forecasts of imminent moves in recent months only to see the old regime prevail. The last such outbreak came in May, when some predicted China would use a national holiday week to try to sneak in a change, assuming that markets would be relatively quiet.
In recent weeks, anticipation has been building anew, with many predicting that a move will come sometime in August, ahead of a visit to Washington by President Hu Jintao in September.
China has long said it plans eventually to allow its currency to float with the market to limit the surge of speculative investment that has been entering the country in anticipation of a revaluation, cognizant that similar rushes of capital in and out of Thailand and South Korea helped trigger a financial crisis last decade.
But China has said it first must strengthen its financial system, which is choked with some $500 billion in bad loans, according to private economists.
Beijing has insisted that it will alter its currency regime only on its timetable. Even the appearance of caving to outsiders could invite a flood of speculation on a subsequent move and also would risk a potentially destabilizing loss of face: Nationalism remains an important claim to legitimacy for a Communist Party government whose economic policies now run closer to Warren Buffett than to Karl Marx.
Most analysts assume China has already decided to make some sort of currency move and will time it to extract maximum political benefit, lending credence to the assumption that it could be carried by Hu as an arrival gift for his American hosts.
But many economists assert that even if such a move did cool tensions with the Bush administration, it would not carve into China's $162 billion trade surplus with the United States. Most economists say the value of the yuan bears little connection to U.S. jobs and wages because much of China's export growth is in goods that have not been made in large quantities in the United States for years, such as textiles, toys, furniture and home appliances.
"Revaluing the currency would hardly make a dent in U.S. economic trends," said Jonathan Anderson, chief economist at UBS Investment Research in Hong Kong. "Does anyone in the U.S. really care whether Chinese manufacturing workers make $100 or $120 per month?"
For China, however, a large move could be fraught with risk. Even if a higher-valued currency didn't help U.S. manufacturers, it could make China's goods less competitive than those produced in other low-cost countries such as the Philippines and Mexico. China's surging exports have been a key source of factory labor in a country that needs to create tens of millions of new jobs for farmers whose incomes are falling.
"The Chinese government should hold the line against a revaluation no matter what political pressure it faces," said Yi Xiangrong, a finance expert at Chinese Academy of Social Sciences in Beijing and one of the economists surveyed. "They know the possible dangers."

posted by Henry @ 2:16 PM