WASHINGTON -- China's exchange rate has breached the psychological threshold of eight yuan to the U.S. dollar for the first time in a dozen years -- the latest sign of thawing relations with its major trading partners.Yesterday, less than a week after the Bush administration opted not to brand China a currency manipulator, Chinese banking officials responded with the first significant move in China's exchange rate in more than a month. The People's Bank of China set an official exchange rate of 7.9982 yuan to the dollar at the opening of heavily regulated trading in Shanghai. During the day, the Chinese currency strengthened a little further, to 7.9972, but then reversed direction to close at 8.003.
Less -- not more -- political pressure appears to be driving Chinese decision making, analysts said. Merrill Lynch economist David Rosenberg said the small but significant upward move in the yuan is likely a "quid pro quo" for last week's decision by the U.S. Treasury Department report not to identify China as a currency cheat, which would have been the first step to imposing sanctions on the country. China, on the other hand, is eager not to be seen to be bending to U.S. pressure. Chinese officials also worry that wild fluctuations in the yuan could undermine the country's fragile banking system.
The go-slow strategy seems to be winning over some key U.S. critics. "The fact that the yuan finally dipped below eight is good news, but only if it portends further movement," said New York Senator Charles Schumer, co-sponsor of a bill that would hit China with a 27.7-per-cent tariff on all imports.
| Thanks for that important insight, Chuckles. |
Chinese officials suggested yesterday that a further upward move in the yuan is likely. In a joint statement issued after a meeting of Chinese and European Union officials in Beijing, China pledged to "further improve" the yuan exchange rate mechanism and "constantly make the exchange rate more responsive to market supply and demand."
China's trade deficit with the United States and the rest of the world hit record highs in 2005. Critics said Beijing may be artificially undervaluing the yuan by as much as 40 per cent to flood global markets with cheap goods. Last July, China adjusted its peg to U.S. currency from 8.28 to the dollar to 8.11. Under the new rules, China allows the yuan to move by as much 0.3 per cent above or below the daily rate it sets. So far, China has only allowed the yuan to rise by a total of less than 1.5 per cent.
Last week, U.S. Treasury Secretary John Snow said China is in the midst of "a historic transformation to a market system" that would be good for both countries in the long run. And he said Chinese currency policies don't rise to the level of manipulation.
The warmer climate of relations began with a visit to China earlier this year by Mr. Schumer and Lindsey Graham, who co-sponsored the U.S. tariff bill. After meeting top Chinese banking officials, Mr. Schumer and Mr. Lindsey said they would delay a vote on the legislation until at least September. All that was a prelude to last month's visit to the United States by Chinese President Hu Jintao. At a White House meeting, Mr. Bush prodded his Chinese counterpart to do more to ease the U.S.-China trade gap, which hit a record $202-billion (U.S.) last year.