World hopes China’s yuan will rise, bring relief

BEIJING (AP) — China’s decision to end its currency’s 2-year-old peg to the U.S. dollar is stirring anticipation of a gradual appreciation in the yuan in trading Monday — an increase that would bring relief to foreign manufacturers struggling to compete with cheap Chinese products.

Beijing long has refused to allow the yuan, also known as the renminbi, to float and denied accusations that its currency is unfairly undervalued. The debate became particularly strident during the global recession, when manufacturers from Brazil, Europe, the United States and elsewhere were stung by China’s ability to keep the prices of its exports low.

But the communist leadership finally has acceded to foreign pressure just a week ahead of a summit of the G-20, where President Hu Jintao likely would have been hammered by critics of the currency policy.

China, however, is still steering a path to recovery, and with workers at home demanding wage hikes — which also would increase the price of exports — the central bank has sought to curb speculation of a major strengthening of the yuan’s value.

“There is at present no basis for major fluctuation or change in the renminbi exchange rate,” the People's Bank of China said in a lengthy commentary posted on its website Sunday.

Keeping the rate at a “reasonable, balanced level” would contribute to economic stability and help restructure the Chinese economy with greater emphasis on services and consumption, the statement said.

The yuan’s value has been pegged to the U.S. dollar for two years, causing major friction with countries that say the yuan is undervalued to China’s own benefit. The bank’s statement said it would rely more on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone.

Chinese officials long have said reforms to the currency would be gradual. While no specific policy changes were mentioned, financial markets will be watched closely Monday for any effects.

President Obama said China’s move would help protect the economic recovery, while the European Commission said it would benefit “both the Chinese economy and the global economy.”

The announcement follows warnings from Beijing last week against making its currency policies a main focus of the G-20 summit, being held June 26-27 in Toronto.

Industrial Bank economist Jiang Shu said the timing of the announcement marked an attempt to alleviate such pressures and forestall criticism of China at the summit.

“It’s a way of throwing out the carpet for the G-20, displaying again to international society the Chinese government’s determination on the exchange rate issue,” Mr. Jiang was quoted as saying on the website of the National Business Daily, a leading financial newspaper.

At home, though, many were skeptical about the announcement Saturday, accusing the government of caving to foreign pressure at the expense of Chinese economic health.

Writing on the National Business Daily website, economist Ye Tan said the move would pile pressure on exporters already contending with a roughly 15 percent appreciation of the renminbi against the euro, as well as rising labor costs.

“China’s exports are unstable and this is having a major impact on the actual economy,” Mr. Ye wrote. “Appreciation of the renminbi needs to wait until economic readjustment is certain and China’s domestic demand has truly expanded,” Mr. Ye said.

On the message boards at the popular Sohu.com portal, commentators vilified the move as a sellout that betrayed long-standing government claims that the exchange rate was not a problem. Some commentaries there and other forums were removed quickly by censors drilled to stymie criticism of the government or discussion of sensitive topics.

Beijing has kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand. Under pressure from its trading partners, China began letting the yuan appreciate gradually against the U.S. dollar in 2005 but halted that abruptly in 2008 as the global financial crisis took hold.

Since then, the yuan’s value has remained at roughly 6.83 to the dollar.

Economists have said they expect China to permit a gradual appreciation of the yuan while keeping trading within a narrow band of just a few fractions of a percent each day.

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