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China severs its currency link to dollar { July 21 2005 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/21/AR2005072100351.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2005/07/21/AR2005072100351.html
China Severs Its Currency's Link to Dollar
By Peter S. Goodman
Washington Post Foreign Service
Thursday, July 21, 2005; 9:27 AM
SHANGHAI, July 21 -- China on Thursday said it would allow the value of its currency, the yuan, to increase slightly on foreign exchange markets, while also abandoning its decade-old fixed exchange rate to the U.S. dollar in favor of a rate pegged to a broader basket of world currencies.
The evening announcement on Chinese state television accompanied a statement from the country's central bank, delivering the first concrete progress toward allowing the yuan, also known as the renminbi, to float freely with the whims of world markets -- something China's leaders have long said they plan to do eventually, without offering a timetable.
The move could ease tensions between China and the United States on what has for months stood as a primary source of trade friction between the two countries. The Bush administration, pressured by trade groups and vocal members of the Congress, has been conducting a public lobbying campaign to persuade China to raise the value of its currency, arguing that a low-priced yuan has given the country an unfair advantage on world markets by keeping its goods artificially cheap.
Thursday's move may be too small to assuage China's critics in Washington, who have demanded that Beijing increase the value of its currency by at least 10 percent and as much as 40 percent. The People's Bank China, the country's central bank, said it would immediately allow the yuan to rise from its current 8.28 to the dollar to 8.11 -- an increase of about 2.1 percent.
Still, analysts emphasized that Thursday's move was likely the first of a series of measures that will eventually allow the yuan to move in a broader trading band with other currencies and eventually float freely, although probably not for several years. They suggested the beginning of this process could take the edge off China's relationship with its global trading partners.
"This is the first step in a long path," said Jonathan Anderson, chief economist at UBS Investment Research in Hong Kong. "It's the beginning of a move toward greater flexibility."
Economists have long been expecting the moves, and most expressed little surprise. By eliminating the yuan's direct and fixed link to the value of the dollar, China gains power over its own monetary policies, rather than simply accepting the impact of whatever policies the U.S. Federal Reserve opts to employ, economists said.
By widening the band in which the yuan trades, China can allow its currency to adjust to the inflows of investment chasing returns in the world's fastest-growing major economies. A surge of outside investment has resulted in China's foreign exchange reserves piling up in excess of $600 billion, sowing worries among the country's leaders that it could fuel an over-investment binge.
China has consistently maintained that it would set its economic policies on its own timetable and would not yield to foreign pressure, while rejecting the notion that its cheap currency is stealing American jobs. It has long set as a goal eventually allowing its currency to float freely as part of the reforms that have turned this once insular Communist country into a land ruled increasingly by capitalism, even as the state continues to play a strong role in directing flows of money.
Still, analysts said the timing of the move signals China's intent to alleviate tension with the United States. The currency change comes ahead of a planned September trip to Washington by Chinese President Hu Jintao, and as Congress has been considering a series of bills that could sanction China as an unfair trader. It also comes as the state-owned Chinese energy company, Cnooc Ltd., seeks to purchase U.S.-based Unocal, which has intensified American scrutiny of China's emerging force in the global economy.
"China's leaders are convinced that this makes sense for China, but if it makes the U.S. happy that's an extra benefit," said Fred Hu, a managing director at Goldman Sachs in Hong Kong. "They could have done this today, they could have done this yesterday or tomorrow. They have planned this move very carefully. It signals a genuine desire to placate U.S. concerns."
© 2005 The Washington Post Company
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