China Allows Its Currency to Inch Up Against Dollar

10/28/2005

By KEITH BRADSHER
NY Times
Published: October 28, 2005

HONG KONG, Oct. 28 - Beijing authorities allowed China’s currency to inch up today through a psychologically important benchmark against the dollar, a step that underlined the recent willingness of Chinese officials to tolerate very gradual currency appreciation.

The yuan crept up to 8.084 to the dollar today, for a total increase of 32-hundredths of a percent in the 14 weeks since China revalued its currency on July 21. At the time of the revaluation, Chinese authorities said they would not allow the yuan to rise or fall more than three-tenths of a percent against the dollar in a single day.

In practice, China has held appreciation to a few thousandths of a percent a day. The pace is so slow that, like the 2.1 percent revaluation in July, it has satisfied few critics.

“Neither movement is going to have any appreciable effect on the relative prices of U.S. and Chinese goods,” said Alan Tonelson, a research fellow at the United States Business and Industry Council, a Washington-based trade association that calls for more confrontational American trade and currency policies and represents about 1,000 small and midsized American manufacturers

Economists and currency strategists said that the Chinese decision to let the yuan finally breach the three-tenths of a percent today proved that the Chinese were not using the daily trading limit as a long-term limit on the yuan’s value. But they emphasized that the overall pace of currency appreciation in China was likely to remain very slow, despite pressure from the United States, Japan and the European Union.

“It’s pretty meager,” said James Malcolm, a currency strategist in the Singapore office of Deutsche Bank.

Liang Hong, an economist at Goldman Sachs, said in a research report late today that the appreciation of the yuan showed some willingness by Chinese officials to accept greater appreciation and not use the daily trading band as an overall limit on the currency’s value.

Mr. Malcolm pointed out, however, that the yuan had risen against the dollar even as the dollar has risen against other currencies, showing the likely long-term strength of the currency market. “That tells you something about the trend,” he said.

Trading in Singapore of nondeliverable forward contracts based on the yuan’s value suggests that the yuan will be worth 7.8 to the dollar a year from now.

The ambiguous phrasing of the initial revaluation announcement in July contributed to confusion about how quickly the People’s Bank of China, the central bank, would actually allow the currency to rise.

Some politicians and manufacturers in Washington called then for the yuan to rise by three-tenths of a percent every day until it met their demands for a double-digit percentage increase in the yuan’s value. Some of China’s critics suggested that the daily trading band was really a long-term limit.

The daily limit was important because in addition to revaluing the currency by 2.1 percent against the dollar on July 21, the People’s Bank of China, the country’s central bank, also said then that it would link the yuan’s value to a basket of currencies, not just the dollar.

The central bank’s governor, Zhou Xiaochuan, said in Shanghai three weeks later that the basket was dominated by the dollar, the euro, the Japanese yen and the Korean won, but that it was also influenced by the less traded currencies of Singapore, Britain, Malaysia, Russia, Australia, Thailand and Canada.

Economists who have run statistical models since then have found that the yuan continues to behave as though it is pegged almost entirely to the dollar, with a slight appreciation built in. If other currencies mattered a lot to the yuan’s value, then it would have tended to fall against the dollar over the past three months as other leading currencies have eroded in value slightly against the dollar over this period.

The euro has appreciated against the dollar this week on hints by European Central Bank officials that they might raise short-term interest rates for the first time in five years.