China's Currency Fig Leaf - Forbes.comnternational
China's Currency Fig Leaf
Paul Maidment, 07.21.05, 9:16 AM ET
The Chinese authorities have long said any breaking of their currency's decade-long peg to dollar would be at a time their own choosing, despite more than a year of pressure, primarily from the U.S., to do so.
That moment, long anticipated by foreign exchange traders, has come—sort of.
Today's announcement that the peg will be replaced by a narrow target band (0.3%) set against a basket of (unnamed) currencies effectively revalues the yuan 2.1% against the dollar.
As of Friday, when the change comes into place, one dollar will buy 8.11 yuan compared to 8.28 yuan now.
The question now becomes, is that sufficient to placate Beijing's critics, who argue that China has kept its exchange rate artificially low, making its exports cheaper than they otherwise would be?
This fall, the U.S. Treasury is due to rule if China was a "currency manipulator." If it does, that would open the door to the U.S. Congress to impose punitive tariffs on American imports from China. Such a decision would reverberate across the U.S. retail sector, from Home Depot (nyse: HD - news - people ) to Wal-Mart Stores (nyse: WMT - news - people ).
A preliminary report earlier this year had given Beijing six months to start the revaluation process.
A revaluation as modest as announced today will do little to lessen the swelling trade surplus that China runs with the U.S. Not that many observers, including U.S. Federal Reserve Chairman Alan Greenspan, hold any serious expectation that it would, even if the revaluation was as high as 10%.
But today's move is seen as a first step in the liberalization of the Chinese exchange rate, perhaps leading eventually to a free float, amid a raft of economic liberalizations to put China's economy on a more market-based footing.
But as a first step, this move is more about politics, than economics, and, perhaps most of all, the international trade in fig leafs.
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