http://www.nytimes.com/2005/04/30/business/worldbusiness/30yuan.html?hp&ex=1114920000&en=d45751ec00918579&ei=5094&partner=homepage
April 30, 2005 A Currency Afloat (for All of 20 Minutes) By KEITH BRADSHER HONG KONG, April 29 - The Bush administration has been pressing the Chinese government for years to allow its currency, which is pegged to the dollar, to trade more freely. It got its wish on Friday - but only for 20 minutes. A freely trading Chinese yuan would probably rise in value against the dollar, making Chinese exports to the United States more costly. That, in turn, would give relief to American manufacturers battered by low-priced Chinese goods as the American trade deficit has been growing faster with China than with any other country. It would also be a political victory for the Bush administration. Until this afternoon, China had ignored the demands. But as traders drifted back to their desks from lunch in Asian financial capitals on Friday, the yuan suddenly broke out of its prescribed trading range. No one knows for sure if the move was deliberate or a result of a technical glitch. But regardless of whether it was a Chinese test of their ability to manage a rising yuan or simply a case of the Chinese central bank briefly failing to buy enough dollars to keep supporting the American currency, traders noticed it and the prices for many other currencies began to shift in response. The yuan climbed until it took 8.270 of them to buy a dollar instead of the usual 8.276. That difference, of only six thousandths of a yuan, might not seem like much of a change. But it came on the eve of a weeklong holiday in China and at a time of intense speculation that a Chinese revaluation of the currency, which has been fixed by Beijing against the dollar for years, might be imminent. The brief appreciation, a hint of further rises if the yuan were to float, was enough to roil currency markets around the world. The dollar fell and the euro, yen and gold rose as investors placed bets that if China let the yuan rise against the dollar, other countries would also permit their currencies to appreciate against the dollar because their exporters would no longer be so fearful of being undercut by Chinese rivals. Economists said it was almost impossible to discern from the swirl of rumors on Friday whether China was on the verge of finally allowing the tidal wave of investment flowing into the country to push up the value of the yuan. "I wouldn't be surprised if we woke up to an announcement this weekend; I wouldn't be surprised if they waited until this summer," said Jonathan Anderson, an economist at UBS. Traders used to seeing a flat line on their screens day after day for the value of the yuan were especially transfixed by the brief surge because it came the same day that a state-run newspaper, The China Securities Journal, ran an article on its front page that seemed to depart from previous government statements ruling out any shift in currency policy soon. The article asserted that China's financial system and currency regime were finally ready for the yuan to rise, provided that the rise was only a few percentage points. The People's Bank of China, the central bank, issued a public denial by midafternoon that it had received any formal instructions from the country's political authorities to push the yuan to a new level. But the brief movement of the yuan prompted some economists to say that China may have been testing its ability to manage a small fluctuation in the value of its currency, as a possible preparation for managing an eventual change in the yuan's value. Some currency traders said a more likely explanation was that a mistake was made by a Chinese employee, who may have typed a wrong number onto the government's official currency posting. "We interpret it as a technical glitch, rather than an imminent revaluation," said Steven Englander, a currency strategist at Barclays Capital in New York. Frank Gong, an economist at J. P. Morgan, said that the central bank had tolerated tiny spurts in the yuan's value to 8.275 for a few minutes over the last decade. But he said it was highly unlikely that Chinese authorities accidentally let such a large spike in value occur on Friday, especially at a time of intense speculation about the future value of the yuan. "They chose that timing to test the market," he said, adding that he thought China might revalue during the coming holiday week. Beijing authorities pegged the currency at 8.3 to the dollar toward the end of the Asian financial crisis in 1998 and have since kept it in a tight trading range around that level. China's foreign exchange reserves soared by $200 billion last year alone as the People's Bank of China intervened heavily in currency markets, issuing yuan and buying dollars to keep the yuan from breaching the top of the narrow trading range, 8.276 to the dollar. The Bush administration has been calling with increasing outspokenness in recent weeks for China to let the currency rise, which would make imports cheaper in China as well as make China's exports less competitive in the United States and other overseas markets. European and Japanese officials have supported Washington's position but have been less vocal. Many economists within China, including some government economists, have been warning that the country risks serious inflation if it continues printing ever more yuan and exchanging them for dollars in an effort to hold down the value of the yuan in currency markets. The Chinese government has tried a variety of measures, with mixed success, to buy back the yuan that it is issuing in its currency market interventions, most notably by selling bonds to the public and by reducing credit to the banking sector. But political leaders in China have been leery of moving too quickly to permit an appreciation of the currency, known either as the yuan or the renminbi. They fear that a swift rise might lead to layoffs at export-oriented factories and job losses in the countryside as cheap food from the United States and elsewhere would flood in. In interviews at the Canton Trade Fair in Guangzhou on Thursday, executives from companies across China said that a higher yuan would cut into their profit margins. But they differed, depending on their industry, as to whether a stronger yuan would prompt overseas buyers to shift their purchases to other countries. Ma Jilin, the general manager of the Zibo Shuangfeng Ceramics Company in Shandong Province in northeastern China, said that a 10 percent rise in the value of the yuan - larger than most economists expect - would cause many restaurants and other customers to stop buying brightly colored ceramic plates and mugs from his factory and take their business to Malaysia or South Korea. Wages for factory workers have risen 15 percent in the last year because of labor shortages, electricity prices are rising, shipping costs are climbing and high-quality clay is in short supply, he added. "If the renminbi rises, that will make it very difficult for a lot of factories," Mr. Ma said. But Yan Jun, the general manager of the Jinxiang Bristles Industrial Company in Hunan Province in southern China, said that a rising yuan might not have that much effect on overseas demand for his company's pig bristles, used for paint brushes. In a country where pork is practically a staple, pig bristles are so plentiful and inexpensive that any threat comes not from other countries' pig bristles but from synthetic bristles. The synthetic bristles cost one-eighth as much as even the Chinese bristles, and the main issue in the industry is whether buyers will decide to accept the inferior quality of the synthetic materials, in which case the value of the yuan will be irrelevant, Mr. Yan said. Even before Friday's brief rise in the yuan, The China Securities Journal report prompted a rise in the value of the euro and especially the yen, with the yen climbing 1.16 percent, to 104.83 to the dollar in New York trading. The State Administration of Foreign Exchange, which manages the country's currency reserves, issued a statement on Friday, outlining some administrative changes in the handling of foreign currency transactions within China and saying that it wanted to "provide better conditions in the foreign exchange market." The statement gave no specific clues about the value of the yuan. ------------------------ Yahoo! Groups Sponsor --------------------~--> Give underprivileged students the materials they need to learn. Bring education to life by funding a specific classroom project. http://us.click.yahoo.com/FHLuJD/_WnJAA/cUmLAA/TySplB/TM --------------------------------------------------------------------~-> -------------------------- Want to discuss this topic? 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