- The Washington Times - Sunday, July 24, 2005

BANGKOK — Beijing, having ended the dollar link that anchored the Chinese economy through years of meteoric growth, now is tackling its next big task: managing expectations of what comes next.

China’s central bank governor launched into that job over the weekend, warning that the decision to link the value of the Chinese yuan to a “basket” of currencies, instead of just the dollar, and to raise its value by 2 percent, to 8.11 yuan per dollar, was no cure-all for the U.S. trade deficit.

“China’s exchange-rate reform won’t have too much influence on U.S. deficits,” Zhou Xiaochuan, governor of the People’s Bank of China, told a conference of bankers Saturday.

The United States and China’s other trading partners have been pushing Beijing for years to let the yuan rise, saying it was undervalued by up to 40 percent, giving Chinese exporters an unfair price advantage.

Engaged in the precarious act of balancing demands from its trading partners for a stronger, freer yuan with their own desire for control, China’s secrecy-obsessed communist leaders chose a compromise that raises as many questions as it answers.

The announcement by the People’s Bank of China late Thursday did not say what currencies would be used to determine the value of the yuan, also known as the renminbi, or “people’s money” — or exactly how the system would be managed.

Despite vows of greater flexibility, what is clear is that most of China’s currency controls remain firmly in place. Trading in the yuan is limited mainly to exchanges for trading purposes only — a constraint meant to stave off potentially destabilizing speculative dealings while also preventing Chinese investors from freely shifting their savings overseas.

“The People’s Bank will strive to raise its level of control and regulation, improve foreign-exchange management and maintain a basic stability of [the] renminbi exchange rate,” the Communist Party newspaper People’s Daily said in a published interview with an unnamed central bank spokesman.

For more than a decade, from early 1994 until Thursday, the yuan’s value was kept trading within a narrow band around 8.28 to the dollar.

The new system allows it to trade within a range of 0.3 percent on either side of the yuan’s daily level — a figure to be determined not just by the basket of currencies, but also by the trade surplus, economic policy needs and the ability of Chinese companies to adjust to exchange-rate fluctuations, the central bank spokesman said.

In theory, the yuan could rise significantly over the coming months if the central bank allows its value to shift within the limits it specified. But as if to underscore the authorities’ determination to maintain control, the yuan barely budged from its new opening price of 8.11 to the dollar, closing Friday at 8.1111.

That means that compared to where it was trading the previous 10 years, the yuan rose in value by about one-quarter of a U.S. cent to 12.33 cents.

Whether that will be enough to satisfy critics of China’s gargantuan trade surplus with the United States, which hit a record-high $162 billion last year, remains to be seen.

“Will this appease the hawks in the U.S. toward the Chinese trade issue?” Jonathan Anderson, an economist for UBS, wrote in a research note Friday.

“It will probably be touch-and-go on this one, and only time will tell,” he said.

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