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Yuan Revaluation Viewed as “Baby Steps”
Ruby Wong
7/29/2005

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Analysts say China’s currency revaluation is a modest move that is unlikely to end diplomatic tensions over a range of issues, from dumping of cheap Chinese imports to increases in China’s military spending.

For the first time in a decade, China revalued its currency by 2.1 per cent to 8.11 yuan per US dollar on July 21 and moved to a managed floating exchange rate regime based on market supply and demand, with reference to a basket of it’s major trading partners’ currencies, but it is unwilling to disclose the composition of the currencies basket.

The Chinese central bank said the yuan would be allowed to move in a tight range of 0.3 per cent up or down from the previous day’s close – the same flexibility China has had, but rarely chose to use, since it adopted a “managed float” policy in 1994.

US Federal Reserve Chairman Alan Greenspan said the revaluation was a “good start”, but said it would have minimal impact on the worsening US trade deficit.

US Senator Charles Schumer, one of the many US senators who have been pushing to impose a 27.5 per cent tax on Chinese imports if China did not revalue, called it a “baby step”.

The 2.1 per cent revaluation was well short of the 10 per cent change Washington had been seeking.

Analysts described the long-awaited move as modest and said it would have a limited economic impact.

“This is the Chinese taking a step, but a step that I think will widely be regarded as tokenism rather than substance. So I think, politically, it is not going to get them very far,” said Kenneth Lieberthal, a China expert at University of Michigan.

China had been under pressure from the United States and other trading partners to revalue the yuan, which they said was undervalued and gave Chinese exporters an unfair advantage on world markets, costing thousands of manufacturing jobs.

US lawmakers also blamed the undervalued yuan as the cause of their country’s record trade deficit of $US162 billion ($A212 billion) with China in 2004.

With alarm mounting over Chinese firms buying up US companies such as CNOOC’s bid for Unocal, and the Pentagon’s warning of the potential threat from China’s modernising military, it remains to be seen how much political capital China will gain from the revaluation.

EU diplomats in Beijing were cautious about the revaluation, saying they needed to clarify the new system with the People’s Bank of China before being able to say whether it would go any way towards curbing China’s exports.

Economists said it is in China’s interest to adopt a flexible currency because it is increasingly hard for China to keep the money fixed with the fast-growing trade surplus and the influx of capital investment.

Some information for this report was provided by Reuters and AAP.


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