07/22/2005, 00.00
CHINA
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Expert comments on yuan's (small) revaluation

Opinions are positive about the small revaluation (+ 2 per cent) but see it as insufficient. Fear that it might lead to lower exports and job losses.

Beijing (AsiaNews/Agencies) – Following years of international pressure, China decided yesterday to revalue its currency by 2.1 per cent and no longer pegged it against the US dollar. The yuan will from now on be linked to a basket of currencies, China's central bank announced in an official statement. It is not known however which currencies will form the basket.

The bank said it will hold the exchange rate at a reasonable and balanced level and will maintain stability in the financial markets and the economy.

The rate, which was pegged at 8.11 yuan against the US dollar for about ten years, now stands at 8.28 per dollar.

Over the past two years, the United States together with the European Union and Japan have accused China of keeping the value of its currency artificially low to lower the costs and increase the competitive edge of its exports.

The US Congress was threatening to impose a 27.5 per cent tariff on Chinese imports if Beijing did not change the yuan's exchange and revalued it.

This development "clearly puts China on the right path," US Treasury Secretary John Snow said. But "we will monitor China's managed float as their exchange rate moves to alignment with underlying market conditions," he added.

Federal Reserve Chairman Alan Greenspan also said Thursday's revaluation was a "good start".

Yet, even if most US commentators view it positively, they consider the move insufficient to align the currency to its market value and inadequate to solve ongoing trade and diplomatic rows unless it is followed up by other steps.

Yao Jingyuan, chief economist with China's National Bureau of Statistics, said that pegging the yuan to a basket of currencies will maintain the stability of the country's financial system. "It will help reinforce exchange rate mechanisms," he said, adding that any negative impact on exports will force Chinese companies to become more competitive.

The decision to change the exchange rate is linked to fear of inflation after GDP growth in the first half of the year reached 9.5 per cent.

Other Asian currencies are expected to rise against the dollar, no longer fearful of losing competitive ground to China.

For some analysts, the Chinese government wants to see the effects of the revaluation before taking any other initiatives.

"It could have a significant impact on the profitability of China's export sector, as it has a low profit margin," Morgan Stanley economist Andy Xie said.

Lower exports might cause plant closures and job losses among rural migrants workers already forced to take mere subsistence wages.

Still, others are less convinced of the danger. "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," said Joseph Quinlan, chief market strategist at Bank of America's investment strategies group. "Not when average hourly compensation costs for a factory worker in China are just 64 [US] cents an hour."

If revaluation leads to lower cost imports to China, sectors like steel and real estate and higher income groups should benefit.

And should it not come with a more equitable social policy and better wages, it is likely to widen the gap between haves and have-nots.

Lower exports might also reduce the flow of foreign capital into China—something that has already happened in the first semester of this year—where it often takes the form of joint ventures between foreign and local companies attracted by low wages. (PB)

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