China knows this works because Hong Kong did it for a century.
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China looks at linking yuan to currency pool
By Keith Bradsher The New York Times
FRIDAY, JUNE 10, 2005
HONG KONG The standing committee of the Chinese Communist Party's Politburo is actively considering breaking the 11-year link between the country's currency, the yuan, and the U.S. dollar, and linking the yuan's value instead to a group of currencies, current and former senior Chinese officials said in interviews.
Under the proposal being reviewed at almost daily meetings of the standing committee, a basket of currencies would be used to set the value of the yuan. The yuan would move up and down in currency markets with the average values of the dollar, the yen and the euro and possibly other currencies as well, like the pound.
But the initial exchange rate under the new system could be very close to the current value of 8.277 yuan to the dollar.
The members of the standing committee, who are the nine most powerful men in China, are wary of letting the yuan rise sharply in value at the same time that it becomes linked to a basket of currencies, current and former officials said.
Pegging the yuan's value to a basket of currencies, and not just the dollar, would make it a little more flexible and less prone to the swoops and swoons of the dollar in recent years.
If the dollar fell against the euro, yen or any other currencies in the basket, then the value of the yuan would creep up in dollar terms. If the dollar rose, as it has for the past month, then the yuan could actually fall in dollar terms, making Chinese exports even more competitive in America than they already are.
The Bush administration and many members of the U.S. Congress have been calling for China to let its currency appreciate, and are unlikely to be satisfied with a policy shift that effectively leaves the currency at its current value for the time being.
Finance ministers from the G-8 countries - the United States, Britain, France, Germany, Italy, Canada, Japan and Russia - are to meet in London on Friday and Saturday. They are expected to issue another statement urging China to allow greater flexibility in the yuan.
If Beijing were to push up the value of the yuan, Chinese goods would become more expensive in the United States and U.S. goods would become cheaper in China. Economic theory suggests that this would cause the U.S. trade deficit with China to narrow somewhat. The same would be true generally in Europe.
The standing committee has made no decision yet on when or whether to act, and may make a decision soon or wait as long as until next year, current and former officials said.
But the deliberations have taken on an urgent tone lately. Senior economic officials have been instructed to be on hand for consultations at any moment.
Yang Weizhe, the mother of Zhou Xiaochuan, the governor of China's central bank, died at 6:30 a.m. on May 31, but Zhou was still required to attend a standing committee meeting on the currency an hour and a half later, said one of the people interviewed.
The yuan has been pegged to the dollar since 1994. After starting at 8.7 to the dollar then and gradually appreciating for nearly four years, the yuan was locked at 8.277 to the dollar in 1998 during the Asian financial crisis and has stayed there ever since. The government has allowed the currency to vary only one-hundredth of 1 percent from that level either above or below. Wider variations have occurred for only a few minutes or, on April 29, for 20 minutes.
Alan Greenspan, chairman of the U.S. Federal Reserve, warned at a conference Monday night that other developing countries with low wages might export more to the United States even if an appreciation of the yuan priced Chinese goods out of U.S. markets. "It certainly is not going to be a major impact" on the overall U.S. trade deficit, he said.
Some economists in China have been calling for combining a shift to a basket of currencies with an immediate appreciation of 3 percent to 5 percent in the yuan's value, which would make imports cheaper and help control inflation. But it is not clear how much attention these calls are receiving in what has become an essentially political decision by China's leadership, the officials said.
Chinese leaders have been very concerned that the yuan not rise so much that it would make Chinese goods uncompetitive overseas. The economy in China needs to grow at least 7 percent a year just to create jobs for all the former farmers now pouring into the cities, and exports have been the main engine of economic growth and job creation.
A stronger yuan could result in some factories laying off workers, and it could make imported food even cheaper. This would depress prices for the rice and other staples grown on Chinese farms, potentially sending more farmers into the cities as urban unemployment rises.
Well-connected advisers in Hong Kong to the Chinese government agreed with the current and former senior Chinese officials that the next move by China's leaders was likely to be a link to a basket of currencies, although they were unsure about when this might happen.
"They recognize the need to go away from a peg and move toward a basket," said Victor Fung, a Hong Kong businessman who is chairman of one of the world's largest garment companies and chairman of the territory's airport authority.
Fung said that he thought that each currency's percentage in the basket should match the percentage of China's trade conducted in that currency, an approach favored by many economists. He also said that China should release the relative weightings of the various currencies in the basket. "I think it really ought to be transparent," he said.
But other advisers said that Chinese officials were leaning strongly toward switching to a basket without releasing to the public the weightings of the various currencies.
Such an approach would allow China's leaders more discretion in pushing the value of the currency up or down. But it could also open China up to accusations from the United States and the European Union that Beijing was manipulating the yuan to obtain a commercial advantage for its exports.
The current and former Chinese officials said only that the standing committee was conducting a very detailed review, and did not provide the currency weightings under discussion or whether they would be released. But they said that the leadership was very aware of the benefits of having the weightings be clear and public.
Also uncertain is whether Chinese officials would peg the yuan tightly to the basket, allowing it to vary only a tiny fraction of a percent from the basket, or whether a wider band of values might be tolerated.
Any Chinese move is likely to be greeted with great attention by financial markets around the world. Of particular interest to many investors will be whether China continues to buy dollar-denominated assets at a brisk pace after a shift to a basket of currencies. A slowing of Chinese purchases could hurt not only the value of the dollar in currency markets but also American stock and bond prices.
HONG KONG The standing committee of the Chinese Communist Party's Politburo is actively considering breaking the 11-year link between the country's currency, the yuan, and the U.S. dollar, and linking the yuan's value instead to a group of currencies, current and former senior Chinese officials said in interviews.
Under the proposal being reviewed at almost daily meetings of the standing committee, a basket of currencies would be used to set the value of the yuan. The yuan would move up and down in currency markets with the average values of the dollar, the yen and the euro and possibly other currencies as well, like the pound.
But the initial exchange rate under the new system could be very close to the current value of 8.277 yuan to the dollar.
The members of the standing committee, who are the nine most powerful men in China, are wary of letting the yuan rise sharply in value at the same time that it becomes linked to a basket of currencies, current and former officials said.
Pegging the yuan's value to a basket of currencies, and not just the dollar, would make it a little more flexible and less prone to the swoops and swoons of the dollar in recent years.
If the dollar fell against the euro, yen or any other currencies in the basket, then the value of the yuan would creep up in dollar terms. If the dollar rose, as it has for the past month, then the yuan could actually fall in dollar terms, making Chinese exports even more competitive in America than they already are.
The Bush administration and many members of the U.S. Congress have been calling for China to let its currency appreciate, and are unlikely to be satisfied with a policy shift that effectively leaves the currency at its current value for the time being.
Finance ministers from the G-8 countries - the United States, Britain, France, Germany, Italy, Canada, Japan and Russia - are to meet in London on Friday and Saturday. They are expected to issue another statement urging China to allow greater flexibility in the yuan.
If Beijing were to push up the value of the yuan, Chinese goods would become more expensive in the United States and U.S. goods would become cheaper in China. Economic theory suggests that this would cause the U.S. trade deficit with China to narrow somewhat. The same would be true generally in Europe.
The standing committee has made no decision yet on when or whether to act, and may make a decision soon or wait as long as until next year, current and former officials said.
But the deliberations have taken on an urgent tone lately. Senior economic officials have been instructed to be on hand for consultations at any moment.
Yang Weizhe, the mother of Zhou Xiaochuan, the governor of China's central bank, died at 6:30 a.m. on May 31, but Zhou was still required to attend a standing committee meeting on the currency an hour and a half later, said one of the people interviewed.
The yuan has been pegged to the dollar since 1994. After starting at 8.7 to the dollar then and gradually appreciating for nearly four years, the yuan was locked at 8.277 to the dollar in 1998 during the Asian financial crisis and has stayed there ever since. The government has allowed the currency to vary only one-hundredth of 1 percent from that level either above or below. Wider variations have occurred for only a few minutes or, on April 29, for 20 minutes.
Alan Greenspan, chairman of the U.S. Federal Reserve, warned at a conference Monday night that other developing countries with low wages might export more to the United States even if an appreciation of the yuan priced Chinese goods out of U.S. markets. "It certainly is not going to be a major impact" on the overall U.S. trade deficit, he said.
Some economists in China have been calling for combining a shift to a basket of currencies with an immediate appreciation of 3 percent to 5 percent in the yuan's value, which would make imports cheaper and help control inflation. But it is not clear how much attention these calls are receiving in what has become an essentially political decision by China's leadership, the officials said.
Chinese leaders have been very concerned that the yuan not rise so much that it would make Chinese goods uncompetitive overseas. The economy in China needs to grow at least 7 percent a year just to create jobs for all the former farmers now pouring into the cities, and exports have been the main engine of economic growth and job creation.
A stronger yuan could result in some factories laying off workers, and it could make imported food even cheaper. This would depress prices for the rice and other staples grown on Chinese farms, potentially sending more farmers into the cities as urban unemployment rises.
Well-connected advisers in Hong Kong to the Chinese government agreed with the current and former senior Chinese officials that the next move by China's leaders was likely to be a link to a basket of currencies, although they were unsure about when this might happen.
"They recognize the need to go away from a peg and move toward a basket," said Victor Fung, a Hong Kong businessman who is chairman of one of the world's largest garment companies and chairman of the territory's airport authority.
Fung said that he thought that each currency's percentage in the basket should match the percentage of China's trade conducted in that currency, an approach favored by many economists. He also said that China should release the relative weightings of the various currencies in the basket. "I think it really ought to be transparent," he said.
But other advisers said that Chinese officials were leaning strongly toward switching to a basket without releasing to the public the weightings of the various currencies.
Such an approach would allow China's leaders more discretion in pushing the value of the currency up or down. But it could also open China up to accusations from the United States and the European Union that Beijing was manipulating the yuan to obtain a commercial advantage for its exports.
The current and former Chinese officials said only that the standing committee was conducting a very detailed review, and did not provide the currency weightings under discussion or whether they would be released. But they said that the leadership was very aware of the benefits of having the weightings be clear and public.
Also uncertain is whether Chinese officials would peg the yuan tightly to the basket, allowing it to vary only a tiny fraction of a percent from the basket, or whether a wider band of values might be tolerated.
Any Chinese move is likely to be greeted with great attention by financial markets around the world. Of particular interest to many investors will be whether China continues to buy dollar-denominated assets at a brisk pace after a shift to a basket of currencies. A slowing of Chinese purchases could hurt not only the value of the dollar in currency markets but also American stock and bond prices.
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