SHANGHAI -- China yesterday assented to longstanding calls to revalue its currency, a decision that could have major repercussions for manufacturing and other industries elsewhere.

Critics of the former fiscal policy hailed the move.

With the yuan now in play, most feel that its value will rise relative to the dollar, thus raising the value of China's goods and services abroad. The effect: the price advantage companies have in making products in China will dissipate.

By "floating" the yuan on the open market, China will now allow its currency to be bought and sold outside the country. In doing so, the value -- that is, the price that someone pays to obtain a given amount of Chinese money -- will fluctuate.

For years, China has not allowed its currency to be bought and sold anywhere but within its own borders. Doing so permitted China to "peg" or tie the value of the yuan to the US dollar. This price has been roughly 8.2 yuan per $1.

Most economists feel the measure has helped depress the value of China's products coming into the U.S. and Europe, while raising the cost of exports into China. That makes China 's products more price-competitive than other nations'.

Over the past 24 months the issue has spilled into the political arena. The Bush administration has been under fierce pressure by trade groups including the National Association of Manufacturers to press China for currency reform.

NAM President John Engler said, “We are pleased that China has now moved away from a fixed dollar peg to what could be described as a ‘crawling peg’ based on a basket of currencies.

“China’s new currency system offers the possibility for continued upward movement of the yuan in the coming weeks and months, and that is what we will be looking for,” he said.

None of this will happen overnight. China has capped how fast the yuan can fluctuate ("move") each day.  Under the new system, the yuan can move as much as 0.3% from an official mid-point, as determined by the prior close.

According to Reuters, currency traders said they expected China's central bank to maintain a level of 8.11, perhaps for months.

"Today’s announcement by the Chinese authorities has the potential for beginning to correct the huge trade imbalances that have been created by distorted currencies – or it fall short if the crawling peg is operated too cautiously,” said Engler.

Still, in the long haul it bodes well for manufacturing in the U.S., and those who supply goods and services to it.

• Prev
• Next