China signal it may let currency rise could aid US

AP News
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Posted: Nov 12, 2009 5:37 PM

The dollar edged up in trading against other currencies Thursday as the Chinese government appeared to signal that it may be willing to let the value of its currency rise.

The United States and other countries would benefit from a rise in the value of the Chinese yuan because their exports would become cheaper for Chinese consumers to buy and could help stimulate their economies.

The surprise announcement in a quarterly report from China's central bank came only days before a visit to China by President Barack Obama. If the Chinese did let their currency resume rising against the dollar, it would be a victory for the Obama administration. The administration is under political pressure to do more to battle unemployment in the United States.

U.S. manufacturers contend that the Chinese yuan, which Beijing has effectively pegged to the dollar, is undervalued by up to 40 percent. This makes Chinese goods cheaper for consumers and businesses in the United States to buy. But it makes American products more expensive in China.

U.S. companies argue that this disparity contributes to America's huge trade deficit with China, which hit a record $268 billion last year.

The Chinese, under prodding from the Bush administration, had begun to let their currency rise in value against the dollar in mid-2005. But Beijing halted that rise in the summer of 2008, once the global economic crisis began to cut into its exports.

The administration had said that Obama would raise the currency issue during his talks next week in Beijing with President Hu Jintao.

On Thursday, the Chinese central bank said in a quarterly report that it planned to revamp the yuan exchange-rate process. It said it would do so by taking into account changes in other major currencies, not just the dollar. The report also omitted language it has used in the past that the goal was to keep the yuan "basically stable at a reasonable and balanced level."

Many analysts saw these subtle changes as a hint that China was preparing to resume allowing the yuan to rise and had timed the announcement to occur right before Obama's visit.

"It is kind of a welcoming gift for Obama," said Nariman Behravesh, chief economist at IHS Global Insight, a forecasting firm. "They are getting the markets prepared for the fact that they are going to be more flexible going forward, but it may not happen overnight."

Behravesh said China could wait for another month or two before it begins to let the yuan rise in value. It has been tracking the value of the dollar since mid-2008, after having risen by about 20 percent against the dollar in the preceding thee years.

China had been pressed not only the United States but also by Europe and its Asian neighbors to stop pegging its currency to the dollar. Those nations' exports have been hurt by the tight yuan-dollar link. As the dollar and yuan have both dropped in value against their currencies, U.S. and Chinese products have become cheaper for foreigners to buy, compared with exports of other countries.

While a yuan that is undervalued by between 20 percent and 40 percent gives Chinese producers a huge competitive advantage, it also means a break for American consumers and major retailers who import a lot from China, such as Wal-Mart.

In a communique that was seen as an effort to lobby the Chinese, finance ministers from 21 Asia-Pacific countries agreed at their meeting in Singapore on Thursday to embrace more flexible exchange rates.

In recent weeks, countries including Thailand, South Korea, Russia and the Philippines have been intervening in currency markets to keep their currencies from rising further against the dollar and hurting their exports in relation to the United States and China. Others, including Brazil, have taken other steps to lessen upward pressure on their currencies.

In late trading Thursday, the 16-nation euro dipped to $1.4866 from $1.4976 late Wednesday, and the dollar rose to 90.32 Japanese yen from 89.84 yen. The British pound edged up to $1.6570 from $1.6554.

Seeking to bolster the dollar, U.S. Treasury Secretary Timothy Geithner said in Singapore that "it is very important for the U.S. that we have a strong dollar, that we sustain confidence in our financial system."

The Treasury is aware of the "angst" of other countries over dollar weakness, said Forex.com chief currency analyst Brian Dolan. But he said that there is nothing that is going to help the dollar rise in the current environment unless the Federal Reserve signals it will boost interest rates, something it has said it does not intend to do as long as the U.S. economy remains as weak as it is. Thursday's small dollar gain is "nothing more than a blip on the screen," he said.

Even with the slight wording change from the Chinese central bank on Thursday, Beijing isn't likely to allow an "aggressive" appreciation in the yuan, Credit Suisse analysts said, because the central bank doesn't think the export recovery has been strong enough to allow such a rise.

In other late trading Thursday, the dollar rose to 1.0162 Swiss francs from 1.0086 francs late Wednesday, and advanced to 1.0546 Canadian dollars from 1.0463.

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AP Business Writer Tali Arbel in New York contributed to this report.