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Brief Rise In Chinese Currency Stirs Markets

By Paul Blustein
Washington Post Staff Writer
Saturday, April 30, 2005; Page E01

Tantalizing hints surfaced yesterday that China might be on the brink of letting its currency rise in value -- and although the evidence was tenuous, it was enough to send foreign exchange markets into a lather.

A front-page article in the state-owned China Securities Journal, quoting unnamed sources, said conditions were ripe for changes in the country's decade-old practice of keeping its currency, the yuan, pegged to the dollar. Then, during early afternoon trading in Asia, the yuan's exchange rate against the dollar briefly departed from its usual, narrow trading band, sparking speculation that a revaluation would be announced in a matter of days. The U.S. dollar fell sharply against other Asian currencies, especially the Japanese yen.


A Beijing bank worker handles yuan, the currency whose shift set off a flutter. (Ng Han Guan -- AP)

"The markets certainly took these things seriously," said Sean Callow, a senior currency strategist at IdeaGlobal in New York, adding, "Personally, I'd be very surprised" if a major official move was imminent.

A spokesman for China's central bank poured some cold water on talk that a revaluation might occur during a holiday next week. "As far as we know there is no plan to revalue the [yuan] in the near future," said Bai Li, a spokesman for the People's Bank of China in Beijing.

The prospect that China would unhinge the yuan from its dollar peg has been a matter of intense interest not only in currency markets but among members of Congress, top Bush administration officials and U.S. manufacturers.

For the past couple of years, complaints have mounted from U.S. firms and their unions that by keeping its exchange rate around 8.28 yuan per dollar, China is maintaining its currency at an undervalued level, giving its exporters an unfair edge on world markets. A cheaper currency makes a country's products less expensive in competition with foreign goods.

Although Chinese policymakers have stressed that they intend to switch gradually to a more flexible currency policy once the nation's shaky financial system has been stabilized, pressure from Washington to move promptly has heated up in the past few weeks. Treasury officials, who previously took a patient stance toward China on the issue, began declaring earlier this month that Beijing has now taken enough measures to safely loosen its hold on the yuan.

So currency markets, which feed on scraps of information suggesting changes in official policy, were already abuzz about yesterday's report in the China Securities Journal when an extraordinary upward blip in the yuan suddenly appeared on traders' computer screens. Though it barely budges most days from a range of 8.276 yuan to 8.278 yuan per dollar, the yuan reached 8.27 per dollar for a few minutes before returning to its normal band.

Some analysts figured that Chinese authorities were conducting a "dry run" for a more flexible yuan, but there was no solid evidence for that theory, and many experts attributed the episode to a computer glitch or tabulating error. China's central bank issued a statement saying it had not changed policy.

But that didn't stop the traders, whose response at least provided evidence for predictions that a Chinese revaluation is likely to have the effect of lifting other Asian currencies. The reason for such predictions is that if the yuan rises, other Asian countries would worry less about their products being undercut by Chinese competition and could allow their currencies to increase in value against the dollar as well. Such an outcome could help shrink the U.S. trade deficit, because American-made goods would gain some competitiveness not only against Chinese goods but against products made elsewhere in Asia.

The yen shot up against the dollar, rising as high as 104.61 per dollar, and was trading late yesterday at 104.69 per dollar, compared with 106.13 late Thursday.

In the "forward" market for the yuan, where traders can speculate on its future value, traders were also betting that the currency system would be changed soon.

Fueling those moves were news reports quoting Frank Gong, a China expert with J.P. Morgan Chase & Co., that Beijing may change its currency regime during a long holiday next week. But others disagreed.

"We don't think these are the ways China would signal a revaluation," said Todd Elmer, a foreign exchange strategist at Barclays Capital in New York.

Echoing that sentiment, IdeaGlobal's Callow said, "Our view is that there won't be a change near-term, because . . . it would be rewarding speculation and bowing to U.S. and global pressure. That doesn't seem to fit the way China approaches other things."

Still, he said, "perhaps the market really is onto something, and the specs are going to make a killing."

Special correspondent Eva Woo contributed to this report.


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