China Lifts Its Currency - and US Hopes ; by Setting the Yuan Higher, China Makes Its Exports Costlier, Which Could Ease the US Trade Deficit

By Mark Trumbull writer of The Christian Science Monitor | The Christian Science Monitor, May 16, 2006 | Go to article overview

China Lifts Its Currency - and US Hopes ; by Setting the Yuan Higher, China Makes Its Exports Costlier, Which Could Ease the US Trade Deficit


Mark Trumbull writer of The Christian Science Monitor, The Christian Science Monitor


The world's most significant trading relationship took a psychologically important turn Monday as China moved to make its exports more expensive.

Chinese officials set a new currency target at slightly less than 8 yuan per dollar - a level it has not seen since a major devaluation in 1994, economists say.

By itself, it will hardly dent the gargantuan US trade deficit, nor will it stem the massive flow of goods across the Pacific from China. But experts say it is a promising move in a tense relationship between two economies that have grown increasingly intertwined.

America and China have been serving as twin engines of the global economy, helping to fuel worldwide growth of 4 percent or higher for several years straight.

Both have benefited from their soaring bilateral trade, but it has also become a source of growing concern. The worry is that global growth is becoming imbalanced, with China's growth too dependent on exports and the US too dependent on foreign nations to finance its trade deficit by buying dollars, often in the form of Treasury bonds.

Moving the yuan below 8 per dollar is largely a symbolic step, but offers some promise to officials and economists who say that "global imbalances" need to be resolved.

"We hope that breaking the psychological barrier of 8 will portend a [larger move] in the near future," says Frank Vargo, an economist at the National Association of Manufacturers in Washington. "China knows it needs to revalue."

In its daily currency announcement, China's government said Monday that the official exchange rate was 7.9982 yuan per dollar. The exchange rate has been carefully managed, with only marginal room for it to fluctuate beyond where Beijing officials dictate. Also Monday, China issued a vague pledge to make the yuan more responsive to market forces. The comment came in a joint statement following a meeting between financial officials of China and the European Union.

Officials in Beijing have been willing to buy dollars to keep the yuan low, but Mr. Vargo says China can't afford to do so forever. "It's a pretty strong signal if you've got to spend $20 billion a month to keep the currency where it is," he says.

That amount represents roughly the amount of the trade deficit, or current-account gap, that the US has been running with China.

The result has been a flood of inexpensive goods for US consumers, and greater difficulties for an already struggling manufacturing base in the US.

The purchase of US dollars by China's central bank creates a 33 percent subsidy for Chinese exports, estimates Peter Morici, an economist at the University of Maryland. …

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