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Thread: China Signals A Gradual Rise in Value of Its Currency

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    China Signals A Gradual Rise in Value of Its Currency

    By KEITH BRADSHER Published: June 19, 2010


    HONG KONG — China announced on Saturday evening that it would allow greater flexibility in the value of its currency, a move that could deflect growing international criticism of its economic policies and defuse one of the greatest sources of tension between Beijing and Washington.

    RelatedTimes Topic:Renminbi (Yuan) The statement, by China’s central bank, was the clearest sign yet that the country would allow its currency to appreciate gradually against the dollar. World leaders are due to meet next week in Canada for economic talks, and China’s currency policies had appeared a certain source of conflict.


    The United States has been leading a chorus of countries urging China to let its currency fluctuate. Many members of Congress believe China’s exchange rate policy gives it an unfair trade advantage, and a movement has been growing to take retaliatory trade action if China did not make an adjustment.


    President Obama and the Treasury secretary, Timothy F. Geithner, immediately praised China’s action. “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Mr. Obama said in a statement. The European Commission also said it supported the move.

    But it remains to be seen whether the move will significantly rebalance the global trade picture. The People’s Bank of China was cautious in its statement about how far its currency, the renminbi, might fluctuate, warning explicitly that “the basis for large-scale appreciation of the RMB exchange rate does not exist.” Chinese officials said the renminbi would move in relation to an unspecified basket of currencies, not just the dollar. Experts said that depending on how the system was designed, China could avoid rapid fluctuations.


    Mr. Geithner alluded to this in a statement, saying, “This is an important step, but the test will be how far and how fast they let the currency appreciate.”


    The first sign of how much currency appreciation will be tolerated is likely to come Monday morning, when the Chinese government will set the initial trading band for the value of the renminbi in Shanghai trading.


    China has kept its currency value low since mid-2008 by pegging it to that of the dollar and not letting it fluctuate. Any trend in the renminbi’s value would have been higher without the peg, making China’s goods more expensive to foreign consumers and possibly slowing the country’s export-based economy.


    In its statement Saturday, the central bank said that the Chinese economy was strengthening after the crisis and that it was “desirable to proceed further with reform” of the currency. Tellingly, the announcement was made almost simultaneously in Chinese and in English, a rare occurrence, and Chinese officials advised foreign governments beforehand that they were about to take a new stance on currency policy, according to an American official.


    Though China said its action was based on the interests of its own economy, it has been under rising pressure from the United States, the European Union, Brazil and India. Mr. Obama had held repeated conversations with President Hu Jintao over the last year or so, the most recent of which was two weeks ago, and Mr. Geithner traveled to China for meetings last month.


    China has handled currency policy gingerly, fearing that its people might see appreciation as a step taken in response to foreign pressure that might not be in the national interest.


    For Mr. Obama, China’s currency has been a particularly sticky problem. He also has been leaning on Beijing to help contain the nuclear programs of Iran and North Korea, to act as one of the main engines for the world economy, and to moderate its efforts to gain exclusive access to raw materials around the world needed to fuel China’s huge growth.


    But Mr. Obama’s leverage has been minimal, and in the end it may have been the threat of a Congressional bill’s protectionist actions against Chinese products that convinced Beijing that it had to begin to free its currency.


    That threat had been gaining ground in Congress among lawmakers convinced that China was keeping its currency value artificially low to the detriment of the American economy.


    “China’s currency practice has cost American jobs and hurt American ranchers, farmers and small businesses,” Max Baucus, Democrat of Montana and the chairman of the Senate Finance Committee, said in a statement Saturday. “Today’s announcement is a welcome first step to help keep American businesses competitive and create more American jobs.”


    Senator Charles E. Schumer, Democrat of New York, however, cautioned that unless China gave further detail to its plan, “we will have no choice but to move forward with our legislation.”

    If the renminbi were to rise significantly, goods from the United States and other countries could eventually start displacing Chinese exports. That could help fuel economic growth in many of China’s trading partners, while braking growth in China, which has been expanding so fast that inflation is now accelerating.


    Rising wages after recent labor unrest, combined with a stronger currency, may also make China a more attractive consumer market for international companies. But this could help Europe more than America, whose exports to China have been weak and concentrated in a few categories like aircraft, turbines and soybeans, while European companies have been more successful in selling high-end consumer goods there.


    For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the government has started to make an energetic effort to improve the standard of living of industrial workers.


    But many economists inside and outside China have argued that currency appreciation is in China’s interest most of all. The country has been spending nearly one-tenth of its annual economic output to buy Treasury notes and bonds and other foreign securities while printing and selling renminbi, all in an effort to prevent the renminbi from rising against the dollar.

    The renminbi has already risen with the dollar by 15 percent against the euro in the last two months. That has made Chinese officials nervous about the future competitiveness of Chinese sales to Europe, the biggest market for Chinese exports.


    Cui Tiankai, a vice foreign minister, said on Friday that the value of the renminbi was not a subject for global discussion, the latest in a series of remarks by Chinese officials indicating strong nationalistic sensitivities about currency policy.


    But people familiar with Chinese currency policy making have been saying for two months that the Chinese leadership agreed in early April to a change of direction. A devastating earthquake in western China in mid-April followed by worries about economic turmoil in Europe delayed action on the decision.


    David E. Sanger and Sewell Chan contributed reporting from Washington.


    http://www.nytimes.com/2010/06/20/bu...html?th&emc=th

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    Looks like we are close to a dong RV!!!

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