China Revalues Its Currency

Government calls its new program a ''managed floating exchange-rate regime''; one observer notes that this ''may well imply more management than fl...
Stephen TaubJuly 21, 2005

China will no longer peg its currency, the yuan, to the U.S. dollar.

The Chinese government announced a new trading program in which China will float the yuan in a tight band against a basket of foreign currencies, according to press reports. For more than a decade the yuan has been pegged at 8.28 to the U.S. dollar; the new program begins with a shirt of 2.1 percent, to 8.11 yuan per dollar.

It is not yet clear exactly how this program would operate, noted’s sister publication The Economist: “The Chinese called it a ‘managed floating exchange-rate regime’, which may well imply more management than floating.”

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Many critics of China’s currency policy have asserted that the yuan was undervalued by 40 percent, enabling Chinese-based companies to flood the United States with low-priced goods and adding to the huge U.S. trade deficit. The revaluation was acknowledged as “a good first step” by Federal Reserve Chairman Alan Greenspan. In a statement, Secretary of the Treasury John Snow said that “reform of China’s currency regime is important for China and the international financial system.”

The Wall Street Journal pointed out that Sen. Charles Schumer (D-N.Y.) and Sen. Lindsey Graham (R-S.C.) suspended votes on a Senate bill to impose a huge tariff on all Chinese imports.

Don’t expect cheers from Corporate America, however. In a June survey by Financial Executives International and Baruch College’s Zicklin School of Business of 186 chief financial officers, 39 percent said a yuan revaluation would have no effect on their companies, while 25 percent said it would have a small to moderate negative impact.

Khiem Do, head of Asia Pacific Equities at Baring, opined that in the short term, manufacturers that have production facilities in China or make significant purchase in that country may be adversely affected. “This is likely to be seen in the automobile industry, amongst textile and consumer durable manufacturers, and in a number of Taiwanese downstream technology companies, as well as in companies such as Wal-Mart,” he observed. Likewise, companies exporting to China are likely to benefit, he added.

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