CHINA “unpeg” yuan gaainst US$ ?

Posted on June 22, 2010

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22 Jun :
For years, the Chinese currency (known as the yuan or the renminbi) has been pegged to the value of the US dollar, which has kept the cost of Chinese exports low.

On Monday, the yuan broke through the 6.8 barrier to hit 6.7969 to the dollar, an appreciation of 0.40 percent before closing slightly off the peak.
Yesterday , China’s central bank set a stronger yuan exchange rate , after it had promised to let the currency trade more freely and allow it to float against the US dollar. The People’s Bank of China set the central parity rate — the centre point of the currency’s official trading band — at 6.7980 to the dollar, 0.43 percent stronger than Monday’s 6.8275.

The move was widely seen as a bid to head off rancour at this weekend’s Group of 20 summit in Canada amid mounting accusations abroad that China’s forex controls give its exporters an unfair competitive advantage.
The artificially-low yuan skewed the ability of U.S. manufacturers to compete effectively with their Chinese counterparts, and American exporters have said that an undervalued yuan gave Chinese exporters an unfair advantage on the global stage. If the Chinese currency were to reflect the strength of the world’s third-largest economy, the yuan would be trading at higher levels — and the cost of Chinese exports would rise.

But Monday’s trading level was still within Beijing’s tight trading band and analysts said China’s pledge did not presage a major revaluation.
Some analysts say that the Chinese currency announcement is bunk because China’s move will be “gradual.” The skeptics note that for years, China has talked about currency revaluation, but done little to get there.

Winners would include:
– U.S. exporters (whose goods will be valued more fairly)
– U.S. trade deficit (which could narrow on a more equitable exchange rate)
– U.S. employment (which could rise)
– the Chinese economy (which can’t rely solely on exports to fuel its growth
– Chinese consumers (who will have an opportunity to buy global goods)
– and potentially, Chinese citizens (who could benefit from more government spending at home, because China no longer would have to spend as much money maintaining the artificial currency level).

Losers would include:
– U.S. consumers (who could pay more for China-made goods)
– U.S. importers (who purchase Chinese goods and sell them in the U.S.)
– and in the short-term, bears who bet against a stock market rally today after two consecutive weeks of gains.

Links:
http://biz.thestar.com.my/news/story.asp?file=/2010/6/22/business/20100622091717&sec=business 
http://www.businessweek.com/news/2010-06-21/china-sets-daily-rate-0-43-stronger-biggest-gain-since-2005.html
http://news.yahoo.com/s/nm/20100622/bs_nm/us_china_yuan