[A-List] China Will Allow Its Currency to Fluctuate More

["Yoshie Furuhashi" <critical.montages@xxxxxxxxx>]

<http://www.nytimes.com/2007/05/19/business/worldbusiness/19yuan-web.html>
May 19, 2007
China Will Allow Its Currency to Fluctuate More
By KEITH BRADSHER

HONG KONG, May 18 — China's central bank announced late today that it
would begin allowing the country's currency to fluctuate more during
each day's foreign exchange trading but again rebuffed demands from
the United States and Europe for a sustained rise in the currency's
value.

The central bank also raised interest rates and demanded that
commercial banks set aside more of their assets as reserves that
cannot be lent. The two moves are aimed at tightening credit and
reducing the risk of overheating in an economy that is growing at more
than 11 percent annually and in domestic stock markets, which have
more than tripled since the beginning of last year.

The currency announcement came as top American and Chinese economic
policy makers prepare to meet next week in Washington in an effort to
head off growing pressures from Congress to address the widening
American trade deficit. But the policy shifts announced tonight, which
will take effect on Saturday, are unlikely to have any practical
effect on China's soaring exports, economists said.

The People's Bank of China said in a statement posted on its Web site
that it would allow the currency, known as the yuan or renminbi, to
rise or fall up to 0.5 percent in each day's trading. The current
daily limit is 0.3 percent.

But the central bank gave a clear signal in its statement that the new
policy should not be interpreted as Chinese willingness to allow a
run-up in the value of the dollar. The bank said it would continue to
"keep the exchange rate basically stable at an adaptive and
equilibrium level based on market supply and demand with reference to
a basket of currencies."

The bank issued a separate statement quoting an unidentified spokesman
as saying that the decision does not mean that the exchange rate "will
see large ups and downs, nor large appreciations."

The People's Bank has not allowed the yuan to move the maximum allowed
percentage on any day since it broke the yuan's peg to the dollar on
July 21, 2005. The Chinese government allowed the yuan to rise 2.1
percent then, and has only let it inch up by another 5 percent over
the nearly two years since then.

By contrast, members of Congress from manufacturing states that have
lost jobs during China's export boom have been calling for China to
revalue by 25 percent or more. If China were to allow the yuan to rise
more quickly, this would make Chinese exports more expensive in
foreign markets and would make foreign goods more competitive in
China.

Liang Hong, an economist at Goldman Sachs, said that the wider trading
band represented, "a symbolic but laudable development in China's
foreign exchange reform."

Widening the daily trading band is the latest and most drastic in a
long series of steps by Chinese officials to gently awaken Chinese
businesses to the risks that fluctuating currencies can pose. China
pegged the yuan at 8.27 to the dollar from 1997 to 2005, lulling some
businesses and entrepreneurs into ignoring currency risk.

In interviews last month at the Canton Fair, exporters from all over
China said that they were paying much closer attention to exchange
rates. While Chinese export contracts are still denominated mainly in
dollars, Chinese companies increasingly demand that their foreign
customers agree to provisions requiring the buyer to pay extra if the
dollar starts falling faster against the yuan.

Chinese officials have acknowledged that there are economic arguments
for faster appreciation of the yuan but contend that this could
threaten what they describe as "social stability" — the risk that
Chinese workers and farmers who lost their jobs because of currency
appreciation might stage protests against the government.

Two-thirds of China's population still lives in rural areas and
China's agricultural sector is barely competitive with imports at
current currency levels, raising the prospect of increased rural
unemployment if the yuan were to rise sharply and food exports were to
follow.

The People's Bank of China raised the benchmark regulated rate for
one-year bank deposits by 27 hundredths of a percent, to 3.06 percent,
and increased the benchmark rate for one-year bank loans by 18
hundredths of a percent, to 6.57 percent. By raising deposit rates
more than lending rates, the government showed confidence that the
banks have put enough of their bad loan problems behind them to
survive on slightly narrower profit margins.

The central bank also ordered banks to hold 11.5 percent of assets as
reserves, up from 11 percent. Many banks already have even larger
reserves, however, as they have been swamped with deposits from
China's brisk economic growth and large trade surplus, and have had
trouble finding ways to lend this money.

--
Yoshie