Yielding to increasingly sharp complaints from trading partners, China said Thursday that it will no longer peg the value of its currency to the U.S. dollar.
The Asian nation’s decision to shift to a more flexible exchange system for the Chinese yuan was clearly aimed at easing Bush administration claims that China has been deliberately undervaluing its currency in order to gain an unfair advantage in the U.S. market.
China’s change initially boosted the current value of the yuan relative to the U.S. greenback by only 2.1 percent, however–a bump so modest that it represents more of a political gesture than a move that will have significant effect on the prices Americans pay for Chinese-made goods.
There was little agreement Thursday on whether China’s move is simply a ploy to defuse American pressure, as some argued, or whether it was the start of a potentially dramatic change in the economic underpinnings of the trade between the two nations.
It is clear, however, that China’s small revaluation will be of almost no help in easing the massive trade surplus that nation currently enjoys with the U.S.
“Don’t hold your breath” waiting for the U.S. trade deficit to ease, said Joseph Quinlan, chief market strategist at Bank of America’s investment strategies group.
“In the near term, we doubt Chinese exporters are going to flinch in the face of a modest appreciation of the [yuan] against the U.S. dollar,” he said. “Not when average hourly compensation costs for a factory worker in China are just 64 cents an hour.”
For many U.S. critics, who contend the yuan is undervalued by as much as 40 percent, China’s concession didn’t go far enough.
“I think it’s a good start,” Federal Reserve Chairman Alan Greenspan told a Senate Committee, calling the revaluation “a first step in a number of further adjustments” China will likely make to its currency policy in the future.
“This is a nice token move,” said High Frequency Economics economist Carl Weinberg, noting that there are many unanswered questions about how China’s complicated new policy will work, “but it’s no economic knockout.”
While international-currency matters are complex by their very nature, the U.S.-China currency dispute is burdened with particularly potent political and economic considerations.
Because the rapid rise of China’s manufacturing sector has been accompanied by a financially damaging exodus of American production jobs to Asia, many U.S. voters are uneasy about China’s role in the global economy.
But a cheap yuan, even one that is artificially low, benefits U.S. consumers by making many of the goods they buy cheaper. Indeed, while U.S. manufacturing interests have been complaining of China’s unfair economic practices, the incoming flood of low-cost imports from China has played a major role in holding down U.S. inflation.
And if China were to dramatically boost the value of its currency, as many critics are seeking, one result would undoubtedly be higher consumer prices for the lawn chairs, toasters, bicycles and thousands of other products now primarily sourced from China.
On Wall Street, in fact, news that the price of Chinese goods will go up helped push the shares of discount retailers Wal-Mart Stores Inc. and Target Corp. modestly lower Thursday.
Indeed, given China’s increasingly large presence as a military, economic and political player on the world stage, Thursday’s revaluation represented a delicate balancing act by both sides.
The Bush administration, under pressure from domestic manufacturers, has been anxious to get some concession from the Chinese on the issue, in order to counter criticism that the administration hasn’t been doing enough to address Chinese imports and the loss of American jobs.
At the same time, China appears to be responding to a rising tide of protectionism against its goods in America, through a move that still leaves it with a sizable currency advantage.
The White House has been wary of pushing China too hard on the currency issue for a number of reasons. For one thing, it needs China’s help in trying to bring North Korea to the bargaining table over its nuclear program.
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In addition, China has been investing its massive trade profits in U.S. Treasury securities and other financial instruments; those purchases have helped hold down U.S. inflation at a time of outsize federal deficits. If China were to take a more radical shakeup of its currency policy, many economists suggest, it might inadvertently touch off a global run on the dollar.
Manufacturer groups that have been pressing for help on the yuan’s valuation offered mixed reviews on China’s new floating-rate plan.
The U.S. Business and Industry Council, a lobby group for small manufacturers, fumed that “the Chinese government figures it can placate its critics by budging the currency just a hair,” and added that “this insignificant step is of no help to America’s domestic manufacturers.”
The National Association of Manufacturers, another prominent voice in the fight over China’s cheap currency, offered a more temperate interpretation, saying China’s move is “potentially of enormous significance.”
While the initial revaluation of the yuan is clearly “inadequate,” the group said, it expects numerous upward adjustments in coming months. The revaluation, according to NAM President John Engler, “has the potential for beginning to correct the huge trade imbalances that have been created by distorted currencies.”
Rep. Mark Kirk (R-Ill.), who has formed a congressional group to talk about the U.S.-China economic and political relationship, said, “Not only is China the second-most important market on the planet, but also Chinese diplomacy is becoming more and more important.”
Kirk said that China is “at the center of solving the Korean problem. In an unnoticed step, the Chinese People’s Liberation Army is participating in the Haiti peacekeeping force. That is directly in the United States’ interest, and directly in Florida’s interest. It shows the growing maturity on China’s part.”
The Illinois congressman supported China’s decision, saying it would help improve its economic relations with the U.S. and would likely be the beginning of other currency changes. He said it made little sense to run such a large economy “with a Soviet-style currency. It builds too much inefficiency.”
The Paris-based Organization for Economic Cooperation and Development applauded China’s new currency policy, calling it “an important step” that will help China better integrate into the global economy.
In Washington, Bush administration officials pointed out that China structured the currency change in a way that allows it to make future revaluations against other currencies over time.
“I don’t think any of us expected a major revaluation,” a Treasury Department official said. “That would be uncharacteristic of the Chinese” and the way they have traditionally made new economic steps.
Treasury officials said the International Monetary Fund and other international organizations have been working with the Chinese in helping them technically prepare for the change.
These agencies recently declared the Chinese “capable” of making the change, they said.
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Miller reported from Chicago, and Neikirk from Washington.