China Ends Fixed-Rate Currency

By Peter S. Goodman
Washington Post Foreign Service
Friday, July 22, 2005

SHANGHAI, July 21 -- China on Thursday took an important step forward in its move toward a market economy, announcing it would increase the value of its currency, the yuan, and abandon its decade-old fixed exchange rate to the U.S. dollar in favor of a link to a basket of world currencies.

The evening announcement on state television delivered China's first concrete move toward allowing the yuan -- also known as the renminbi -- to eventually float freely at the whim of global traders.

The move eased tensions between China and the United States on a key source of trade friction. The White House, pressured by manufacturers and vocal members of Congress, has lobbied China to raise the value of its currency, arguing that a low-priced yuan has unfairly kept Chinese goods artificially cheap.

The Chinese move was welcomed heartily by the Bush administration.

"They've put in place a mechanism that provides room for significant movement over time in the currency, and they've expressed a commitment to using market forces to let the currency move," Treasury Secretary John W. Snow said at a news conference. "I think today's developments are extremely positive."

China's most strenuous critics in the United States have demanded that Beijing increase the value of its currency by at least 10 percent. Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) have been pressing a bill that would impose across-the-board punitive tariffs of 27.5 percent against Chinese imports if China does not substantially raise the value of the yuan. Last month, the two senators delayed the vote after saying they had been assured by Snow and Federal Reserve Chairman Alan Greenspan that a Chinese revaluation was imminent.

The details of China's announced shift fell short of their demands. In a statement posted on its Web site, China's central bank said it would on Friday free the yuan to rise to 8.11 from its current 8.28 to the dollar -- an increase of about 2.1 percent. The bank also said it would allow the yuan to move within a trading range of 0.3 percent above or below the previous day's closing price, continuing its "managed float" policy.

The change garnered measured praise from Schumer: "It is smaller than we hoped," the senator said in a news conference. "But to paraphrase the Chinese philosophers, a trip of a thousand miles can well begin with the first baby step. And the fact that they have opened the door to future increases of 0.3 percent makes us feel and hope that this is not the last."

Analysts said Thursday's movement was probably only the beginning of a series of measures that will eventually allow the yuan to move in a broader trading band with other currencies and to float freely -- albeit not for several years.

"The new managed floating currency regime is just an interim system," said He Fan, an economist at the Chinese Academy of Social Sciences in Beijing. "There is a chance of a further widening of the band in the not-distant future, but it will go step by step."

Others suggested that Beijing was not likely to move again anytime soon. "I believe this revaluation will stay in place for the next 24 months," said Yu Nanping, an economist at East China Normal University in Shanghai.

In a sign of China's regional economic influence, Malaysia on Thursday followed with its own announcement that it, too, is allowing its currency, the ringgit, to float within a proscribed trading band. By contrast, Hong Kong announced it would retain its currency peg to the U.S. dollar.

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