China removes currency peg against US dollar

[bigpoppanils]

China Says It Will No Longer Peg Its Currency to the U.S. Dollar

By CHRIS BUCKLEY

International Herald Tribune

BEIJING, July 21 - Following months of political pressure, China today revalued the yuan to 8.11 for every dollar, scrapping a decade-long peg to the currency in favor of a more flexible band using a "basket of currencies."

China's announcement, which has been anticipated and debated by economists and government leaders for months, is the first time in a decade that China has raised the value of its currency, also known as the renminbi, effectively making the yuan and exports more expensive against the United States dollar.

The move represents China's first step toward the more flexible exchange rate that the United States, Europe and many other countries have called for in recently. Until the announcement, the yuan sold for 8.27 for every dollar.

But the change falls far short of the 10 percent to 15 percent revaluation demanded by many in Washington, where the Bush Administration and Congressional leaders have been calling for a higher yuan, in part to alleviate America's growing trade deficit with China.

During one of his semi-annual reports to Congress Wednesday, Alan Greenspan, the Federal Reserve chairman, was asked whether the United States should impose tariffs on China to force a currency revaluation. Mr. Greenspan responded that such punitive measures would not have their desired impact.

"I've said previously that I believe that it is in China's interest to allow its currency to move up, largely because its procedures that it uses to support its currency requires that their central bank accumulate very large quantities of U.S. Treasury securities," he said.

"Unless they sterilize that very substantial inflow, they create significant distortions in their financial system, and ultimately it could be very serious for the Chinese economy. They know that, and they have said that they intend to adjust their currency. The issue that seems to be on the table is when and that - what is the nature of the changes."

The adjustment of the exchange rate is only slight, but China's central bank, the People's Bank of China, seemed to indicate that the adjustment is only the first step in a gradual move toward a looser exchange rate regime.

"For the present stage," the bank said in a statement, the yuan will be allowed to move 0.3 percent up or down in value against the dollar, while the value of other currencies will also be allowed to move up and down within a range announced by the bank.

"The People's Bank of China will adjust the band of the exchange rate when appropriate, based on the maturation of the market and economic and financial circumstances," the statement read.

But it also stressed that the bank will focus on ensuring the "basic stability" of China's exchange rate and "protecting the stability of the macro-economy and financial markets."

Markets reacted swiftly to the announcement. The yen surged 2 percent against the dollar.

China's shift was followed swiftly by announcements from Malaysia that it would move to more flexible exchange rate rules. Singapore's central bank was expected to announce similar measures.

"We have moved to a managed float, to a basket of currencies; it will be positive to the economy," said Zeti Akhtar Aziz, Malaysia's central bank governor told reporters moments after China's announcement, according to Reuters. "We will allow the currency to reflect the fundamentals ... not too far from the current value because it is already reflected on our fundamentals."

"Our country has begun to implement a managed floating based on market supply and demand, and adjusted by referring to a basket of currencies," the People's Bank of China said.

"The renminbi's exchange rate will no longer be pegged to the dollar, and it will form a more flexible exchange rate mechanism."

Other Asian currencies rose after Malaysia announced its change of the ringgit currency peg to a managed float, driving further gains.

Economists said China's initial revaluation will have little impact on world trade and America's growing trade deficit with China.

"At 2% vs. the greenback, this yuan revaluation is unlikely to affect the U.S. trade deficit with China or any of China's trade flows or economic conditions at all," Carl B. Weinberg, chief economist of High Frequency Economics, wrote in a note to clients today. "Local energy and commodity prices will come down a pinch, but the variations will be small. This is a nice token move, but it is no economic knockout."

David O'Rear, the chief economist at the Hong Kong General Chamber of Commerce, said: "A managed float is a very easy interim step for what they want to do. You don't have to tell people what the contents of the basket are. It gives you a lot of flexibility."

David Lague contributed reporting from Hong Kong for this article, and Vikas Bajaj reported from New York.

http://www.nytimes.com/2005/07/21/business/worldbusiness/21cnd-china.html?ei=5094&en=e12a13cb678ded22&hp=&ex=1122004800&adxnnl=1&partner=homepage&adxnnlx=1121958180-IwVjfFrScVQA52d/edqdaA

malaysia is removing its peg as well.

[destruction]

Is this good or bad?

[bigpoppanils]

Is this good or bad?

both.

good: china's competitive advantage on cost will weaken, thus our trade imbalance will decline somewhat. since china will no longer be supporting the dollar as much, the dollar will likely decline against other world currencies. products made in the US become cheaper abroad. it will also be cheaper for foreign tourists to come here.

bad: china buys lots and lots of US government debt. and demand for our debt decreases, interest rates rise (bond prices fall, so yields on bonds rise; most consumer interest rates are benchmarked to bond yields). the costs of goods made in china that are exported here rise. one can expect prices of electronics, clothes, and furniture to rise. hopefully the rise in rates could keep inflation in check...but that doesnt happen sometimes.

[kramadas]

both.

good: china's competitive advantage on cost will weaken, thus our trade imbalance will decline somewhat. since china will no longer be supporting the dollar as much, the dollar will likely decline against other world currencies. products made in the US become cheaper abroad. it will also be cheaper for foreign tourists to come here.

.

But it also makes going abroad that much more expensive. Plus cost of imports rise.

[mateito]

Get ready people china will be #1 in a few years

[drdoom]

both.

good: china's competitive advantage on cost will weaken, thus our trade imbalance will decline somewhat. since china will no longer be supporting the dollar as much, the dollar will likely decline against other world currencies. products made in the US become cheaper abroad. it will also be cheaper for foreign tourists to come here.

bad: china buys lots and lots of US government debt. and demand for our debt decreases, interest rates rise (bond prices fall, so yields on bonds rise; most consumer interest rates are benchmarked to bond yields). the costs of goods made in china that are exported here rise. one can expect prices of electronics, clothes, and furniture to rise. hopefully the rise in rates could keep inflation in check...but that doesnt happen sometimes.

Actually its more beneficial than detrimental. The previous peg gave China a great competitive advantage w/ trade. Go laissez-faire.

[derrtyd323]

I never really understood the concept of pegging to the dollar. Thanks for the article though. Yeah, China is going to be ahead in the future...

[siceone]

you people who think china is going to be ahead of us, can I ask in what way you think they are going to be ahead of us? you can't be AHEAD of anything if all you do is steal your technology. The US is still going to be number one as long as we don't piss away our freedoms.

[bxbomb]

well since the us is plundering nearly a trillion dollars into 1 war and we are selling our Debt to china , the fact that china is buying up major US companies the fact that every stitch of clothing sold in the US is made in china along with ecvery other "junk" goods , CHina spending big $$ on it s military to rival other superpowers and

CHina is also tapping big time now into the Cariibean and latin america almost 50% of there exports go to these countries now . China is even a police force in Haiti to keep the peace there.

stolen technology or not , im a little concerened

[siceone]

Im not sayign you shouldn't be concerned Im concerned for sue but china isnt going to BE number one at anything except maybe having the most poluted country in the world in the next 10 years at the rate they are going. they have no Real Research and Development base for any product. They are turning thier country in to Desert at the rate of liek 5 feet per year. they have toxic water. they have health problems of epiemic proportions every season it seems like, nevermindthe fact that we dont' get all the imformation about things that go one there. If I had to make a prediction about China it would be that they willbe rattling the saber in 10 years over Taiwan so that the west buys them off with aid for their ailing populace and thier crashed economy.