China Repegs Yuan,
Allows “Token” Currency Float
China’s Central Bank announced July 21 that it is repegging the yuan from 8.28 per dollar to 8.11, a 2 percent change. Further, Chinese officials said they will permit the yuan to float in a range of 0.3 percent each day against a basket of unspecified currencies.

Critics were quick to decry the announcement as a political maneuver that will do little to correct the huge inequity created by China’s monetary policy. By pegging the yuan to the dollar rather than allowing it to float freely in global currency markets, the Chinese have maintained a major trade advantage since 1994. The Asian giant’s artificial undervaluation of the yuan has effectively subsidized Chinese goods by up to 40 percent on the world market, experts say, a level that will be little changed by a token 2 percent shift.

“Although China has taken a first, very small step towards a flexible, market-based exchange rate system, this action does not go nearly far enough to respond to our concerns about the impact of Chinese currency manipulation on the North American manufacturing economy,” said Bob Weidner, president and CEO of the Metals Service Center Institute. “The new policy responds to political concerns, but barely acknowledges the underlying significant economic concerns that we and many others in the manufacturing value chain, as well as Congress, have expressed.”

Calling a 2 percent strengthening of the yuan “inadequate” to address a 40 percent undervaluation, Weidner also questioned the efficacy and sincerity of China’s currency floating mechanism. “A 0.3 percent daily defined-band trading range does not constitute a significant movement towards a flexible foreign exchange market valuation,” he said. “As has been the case for the last decade, the final decision on yuan pricing remains with the People’s Bank of China, based on its own agenda, and not to any real extent on foreign exchange markets. This is not a market-based system, but a managed system. Today’s action by the Chinese government is an attempt to reduce current political pressure on China.”

MSCI continues to advocate passage of H.R. 1498, the China Currency Act of 2005, which defines currency manipulation and makes it actionable under U.S. trade law. “It is WTO-compliant and exactly what we need to provide meaningful remedies to American industries injured by currency manipulation,” Weidner added.

Echoing Weidner, the China Currency Coalition called the People’s Bank announcement “a woefully inadequate first step.” The China Currency Coalition is an alliance of American organizations committed to maintaining a strong U.S. industrial base.

“China’s initial actions will not appreciably benefit the global trading system,” said Doug Bartlett, co-chairman of the coalition, and chairman of Bartlett Manufacturing Co. Inc. in Cary, Ill. “China’s actions will not substantially reduce the subsidy to its exports, will not reduce the flow of foreign exchange from subsidized investments, nor reduce speculative flows that endanger the Chinese economy and the global financial system.”

China’s exchange rate measures are minimal and will do nothing to help reverse the continuing erosion of U.S. manufacturing jobs caused by China’s undervalued currency, added Richard Trumka, coalition co-chairman and an AFL-CIO official. “U.S. workers, even though they are the most productive in the world, cannot compete against the 40 percent subsidies that China provides its exporters.”

Economist Peter Morici of the University of Maryland’s Robert H. Smith School of Business agreed that the move—which he called more political than economic—will do little to slow China’s rapidly growing trade surplus. China’s central bank will continue making large purchases of dollars to maintain this new peg, which will have little effect on the prices of China’s exports or imports.

Likewise, the float vs. the basket of unspecified currencies may permit the dollar to fall at the expense of the euro and other currencies, or to rise to the benefit of those currencies, but not by enough to matter, he said. “This basket will only shift around among China’s trading partners the burdens imposed by its large and growing trade surplus, but not by a lot.”

He noted that as Chinese productivity rapidly grows, the intrinsic value of the yuan against the dollar increases by about 4 percent a year. “This revaluation is absolutely inconsequential when seen in that light,” he added.

A vocal critic of current U.S. policies toward China, Morici concluded that China’s repeg will not substantially change U.S.-China economic relations, though it “will provide political cover for the Bush administration.”

Indeed, Treasury Secretary John Snow found China’s move to be encouraging. “I welcome China’s announcement that it is adopting a more flexible exchange rate regime,” said Snow. “China’s full implementation of its new currency regime will be a significant contribution toward global financial stability.”

The National Association of Manufacturers said that China’s shift toward greater flexibility of its currency is potentially of enormous significance, but much depends on how China’s new system is allowed to work.

“We are pleased that China has now moved away from a fixed dollar peg to what could be described as a ‘crawling peg’ based on a basket of currencies,” said NAM President John Engler. “China’s new currency system offers the possibility for continued upward movement of the yuan in the coming weeks and months, and that is what we will be looking for.

“While the initial revaluation is inadequate, we view it as the beginning of what should be a significant revaluation,” Engler added. “China’s new system appears to allow re-valuing the yuan as much as three-tenths of a percent each day—meaning it could move a much as one percent every three days. By October, when the next Treasury Department report on currency manipulation is due, we hope to see that China’s currency has moved significantly enough to begin correcting long-standing trade distortions.”

China’s move may also help address the United States’ larger trade deficit with all of Asia. The Chinese yuan has been holding down other Asian currencies, which may now move upward as well, Engler noted. “Malaysia’s announcement that it will also break its peg to the dollar is, we hope, just the first of many similar announcements to come.”