--- In [email protected], "jsx_consultant" <jsx-
[EMAIL PROTECTED]> wrote:
China Ends Yuan Dollar Peg, Shifts to Currency Basket (Update7)
July 21 (Bloomberg) -- China ended its decade-old peg to the dollar
and said it will let the yuan fluctuate versus a basket of
currencies, responding to criticism from the U.S. and Europe that its
currency was undervalued.
The new yuan rate strengthens the currency by 2.1 percent to 8.11 per
U.S. dollar immediately, the People's Bank of China said on its Web
site. Until now, the yuan had been pegged at about 8.3 per dollar.
The bank said it will continue to maintain a trading band of 0.3
percent.
The yen rose against the 16 most actively traded currencies and had
its biggest gain against the dollar in 2 1/2 years. The yield on the
10-year Treasury note rose 5 basis points to 4.21 percent.
``This was the first step in a series of revaluations that we can
expect in the coming years,'' said Paresh Upadhyaya, a currency
portfolio manager who is part of a group that oversees $29 billion at
Putnam Investments in Boston. ``They'll be gradual.'' Malaysia
followed China's decision, abandoning its seven-year-old practice of
pegging the ringgit to the dollar.
Letting the yuan strengthen may help President Hu Jintao control
inflation by reducing the cost of imported products such as oil and
copper, which are priced in dollars. It also gives the central bank,
which has sold yuan to prevent the currency from appreciating, more
scope to increase interest rates to cool an economy that expanded 9.5
percent in the second quarter.
`More Flexibility'
The yen gained against the dollar after China's decision,
strengthening to 111.81. The Singapore dollar also gained and
Treasury notes declined.
``What they're really doing is leaving the door open to further
revaluations,'' said Jens Nordvig, a currency strategist at Goldman
Sachs Group Inc. in New York. ``By not pegging the yuan to the
dollar, it gives the Chinese more flexibility to engineer a gradual
appreciation.''
Permitting the yuan to trade more freely would also answer criticism
from the Bush administration and some members of the U.S. Congress
that blame China's currency policy for a record trade deficit and the
loss of 2.8 million manufacturing jobs.
The Treasury Department's twice-yearly review of exchange rate
policies said last month that China needs to make the yuan more
flexible or risk being branded a currency manipulator.
``China is now ready and should move without delay in a manner and
magnitude that is sufficiently reflective of underlying market
conditions,'' Snow told the Senate Finance Committee in Washington on
June 23. ``Implementation of trade sanctions would lead to
retaliatory policies against our exports, damaging the U.S. and
global economy.''
Trade Deficit
The U.S. trade gap with China rose to a record $162 billion last year
and the National Association of Manufacturers, a lobby group, expects
it to grow to $225 billion this year.
Indiana Democratic Senator Evan Bayh and Maine Republican Senator
Susan Collins presented legislation on June 23 that would let
companies petition for duties on Chinese goods to compensate for
government subsidies. The bill is one of more than a half- dozen in
Congress that address what some lawmakers call China's unfair trade
practices.
Currency Basket
Linking the yuan to a basket of currencies means China's currency
wouldn't be tied so closely to swings in the dollar, said Adam Cole,
a currency strategist at RBC Capital Markets Ltd. in London. The
basket will probably be composed of the euro, yen and other Asian
currencies as well as the dollar, he said.
``For instance, if we went through a prolonged period of dollar
downward pressure then the yuan would feel all the pressure of that,
but if it was using basket, then the move would be offset by other
currencies doing better,'' said Cole. ``It's an easier way to manage
a currency target.''
Singapore manages its currency by allowing it to fluctuate against a
group of the nation's major trading partners. The Monetary Authority
of Singapore, which reviews its policy every six months, hasn't
disclosed the composition of the basket.
Investors have bet on a change in China's currency since 2002.
``If you let the exchange rate become more flexible, there is one
clear direction it's going,'' said Marvin Barth, a currency
strategist in London at Citigroup Inc., the world's largest bank. He
spoke in an interview last month.
Investment in China
China's $1.6 trillion economy, which accounted for a 10th of world
growth last year, has trebled in size since the yuan peg was
introduced. Foreign direct investment jumped 14 percent to a record
$60.6 billion in 2004, according to government figures. A year
earlier, China surpassed the U.S. as the biggest recipient.
The People's Bank of China has to buy dollars that flow into the
country to maintain the currency peg, adding yuan to the economy and
diluting the impact of state lending curbs. The central bank spent
$193 billion buying foreign currency in 2004, a 41 percent increase
from a year earlier, it said on Feb. 28.
The central bank raised its lending and deposit rates on Oct. 28, the
first increase in a decade, to complement limits on investment in
property, steel and autos that have driven prices higher and strained
power supplies.
``The next move is that people will estimate the stronger yuan's
impact on the growth rate,'' said Steven Chang, vice president of
global markets at State Street Bank & Trust Co. in Hong Kong. ``They
may think the growth rate is going to slow down and wonder if it is
going to be so much more positive for the Asian currencies.''
China is seeking to cap inflation at 4 percent this year from a peak
of 5.3 percent in August. Inflation in 2005 is likely to slow to
between 3.0 percent and 3.5 percent, the People's Bank of China said
on June 14. The consumer price index climbed 1.8 percent in May from
a year earlier, the National Bureau of Statistics said on June 13.
To contact the reporter on this story:
Yumi Kuramitsu in Hong Kong [EMAIL PROTECTED]
Last Updated: July 21, 2005 08:45 EDT
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