China Hints At Letting Yuan Rise Against Dollar
China's domestic press has increased speculation that
the government will loosen the yuan-dollar tie, which
has kept the two currencies' exchange rate set at 8.28
yuan to one US dollar for nearly the past 10 years.
Even though 2004 is only a week old, bold moves by the
Chinese government such as the takeover of China
Southern Securities by the government and the US$45
billion loan to two major Chinese banks strongly suggest
that the new Hu-Wen administration feels confident enough
to tackle China's prickly financial sector problems.
Stories in the Chinese domestic press suggest that it
may be to China's benefit to let the yuan rise against
the dollar now, and some features have argued the benefits
of letting the yuan rise. This is in stark contrast to
discussion in the second half of 2003, when the US, Japan
and European Community were putting pressure on China
to float, or reset the yuan-dollar exchange rate. At the
time, Chinese officials argued that the special social
needs of China's developing economy, especially with the
large number of rural workers resettling in cities, meant
that a cheap yuan was a guarantee of employment and social
stability.
At the same time, China did not want to be seen to be
bowing to foreign pressure, even when it was personally
applied by US President Bush. In the eyes of the Chinese
public, the ability for the new Hu Jintao and Wen Jiabao
administration to publicly say no to someone as powerful
as the US president brought it extra credibility and respect,
and showed that China was no longer considered just another
weak power.
In the final months of 2003, the US position softened,
saying that the Chinese fully understood the US position
and reporting that the Chinese would adjust the rate at
the right time for the Chinese. Undoubtedly, the US' need
for China's support and cooperation in the war on terror,
and in negotiating the North Korea nuclear dispute played
as a factor in the softening of Washington's position.
Now that the external pressure is off, Beijing feels
relaxed enough to allow discussion of a rise in the yuan.
The discussion has started in pro-Beijing Hong Kong papers,
which is the normal pattern. Since Hong Kong is on China's
periphery and is a global financial market, it serves
as a useful place to float economic policy trial balloons.
If the reaction is positive in Hong Kong and global markets,
then the Chinese media will pick up and quote from the
Hong Kong media.
In China, discussion in the media of a change in policy
is normally used as a trial balloon to test public reaction.
If the general flow of public discussion is positive,
then the government feels free to make a change. If it
isn't, it will back off, or bring out economic experts
to discuss the benefits of such a change in policy in
order to convince the public.
On the economic side, the discussion suggests that the
Chinese government feels confident enough that China's
economy can handle a small rise in the yuan, and that
it will be beneficial to the Chinese economy. So far,
all discussion has focused only on a small rise in the
exchange rate, not on a float as some in the west have
pushed for.
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