Move to strengthen yuan may ripple across Asia

WORLD / Wall Street Journal Exclusive

 Move to strengthen yuan may ripple across Asia
By ANDREW BROWNE (WSJ)
Updated: 2006-05-16 10:36

HONG KONG -- Beijing, in a move that ends weeks of stalling and should
help President Bush contain complaints in the U.S. about China, gave the
go-ahead for a stronger Chinese currency.

China's central bank allowed the yuan to briefly break through the
symbolically important level of 8.0 to the dollar. The move came just
days after the U.S. Treasury Department drew back from confrontation with
China by determining that Beijing wasn't manipulating its exchange rate
to artificially boost its exports.

The dollar has been falling against currencies around the globe in recent
weeks, with quiet acquiescence from Washington, where concerns are
mounting over the gaping U.S. trade deficit and the political fallout it
entails. Monday, the dollar briefly fell below 110 yen, its lowest level
in eight months, amid expectations that U.S. interest-rate increases are
coming to an end just as Japan prepares to raise its rates. News on the
yuan also spurred selling against the yen: Signs of a strengthening yuan
tend to lift the yen due to Japan's proximity to China.

Washington has been pressing China and its neighbors to allow stronger
currencies to help cut their huge trade surpluses with the U.S. by making
their exports more expensive in dollar terms. Economists say Beijing's
move might add momentum to currency appreciation around Asia that could
help to unwind global economic imbalances.

Before the start of trading in Shanghai Monday, the Chinese central bank
lowered its daily trading benchmark for the yuan to the point where one
U.S. dollar fetched fewer than eight yuan, a psychologically important
level that it had maintained as a barrier for weeks. By breaching that
level, the bank sent a signal that it will allow the yuan to advance at a
faster pace, traders and economists say.

Since authorities revalued the currency by 2.1% to 8.11 against the
dollar in July, this is the first time the yuan has traded below 8.0 to
the dollar. Since the revaluation, the yuan has climbed only an
additional 1.3% for total appreciation of 3.4%, a considerably slower
rate than the strengthening of other currencies around Asia.

China allows the yuan to rise or fall 0.3% each trading day against a
midpoint benchmark. The "central parity" is announced by the central
bank, and Monday it set that point at 7.9982 compared with 8.0082 on
Friday. The highest level the yuan had reached previously was 8.0022.

However, the yuan didn't remain less than 8.0 to the dollar Monday. After
touching a high of 7.9972, It closed at 8.0030 to the dollar. That
compared with a closing level of 8.0061 last Friday.

"You will see a faster pace of appreciation" for the rest of the year,
says Fan Jianjun, a financial analyst at the Development Research Center,
a Chinese cabinet think tank.

The news about the yuan made Chinese stocks surge on hopes among domestic
investors that a stronger currency will draw in more foreign-equity
investors. The Shanghai Composite Index rose 3.8% to finish at its
highest level in 25 months.

The Chinese move comes at a propitious moment for Mr. Bush's
administration. U.S. Treasury Secretary John Snow is scheduled to testify
tomorrow and Thursday before the House and Senate banking committees
about his decision not to brand China a currency manipulator in the
report on global currencies. Mr. Snow can point to the latest yuan
appreciation as evidence his diplomacy with Beijing is working.

"Greater flexibility in China's exchange rate is a positive development
both for China and for the global economy," Treasury spokesman Tony
Fratto said in a written statement.

"When China reformed its currency regime in July 2005, it established a
mechanism for greater daily fluctuations in relative currency values, and
we encourage Chinese authorities to show more confidence in allowing this
mechanism to work," he added. "However, it's important to note that there
is no specific target for RMB/dollar currency values. Currency values are
best set in open, competitive markets."

U.S. Senator Charles Schumer, a New York Democrat, co-author of a bill
that would impose 27.5% tariffs on imports from China, issued a measured
statement in response to the currency's appreciation. "The fact that the
yuan finally dipped below 8 is good news, but only if it portends further
movement," he said. "The Chinese government knows that reducing controls
on the currency is very important to creating a level playing field in
world trade."

Pressure on Beijing to allow a faster rate of appreciation hasn't all
been coming from Washington. More important from Beijing's point of view,
say many economists, is China's need for a stronger currency to tackle
signs of economic overheating and prevent a crash. Booming exports have
flooded the economy with cash and led to runaway bank lending and
investment. A stronger yuan will help slow the export momentum.

Figures released Monday showed that broad money supply -- including cash
in circulation and deposits in banks and brokerage firms -- rose 18.9% in
April from a year earlier. This helped propel expansion in yuan loans
during the month by 15.5% compared with the same month last year. Loan
growth in March was 14.7%.

Adding to the incoming flood of cash, foreign direct investment in the
first four months of this year totaled $18.48 billion, a rise of 5.8%
from the same period last year, official data showed.

The immediate impetus for the yuan's advance through the 8.0 level was
last week's U.S. Treasury decison not to label Beijing a currency
manipulator. The yuan had been on track to appreciate 3% to 4% against
the dollar before the momentum died in April as Beijing waited for that
decision.

Many economists expect the yuan's rise to pick up pace from earlier this
year. Jonathan Anderson, chief Asia economist for UBS, said he expects
about 5% appreciation for the whole year.

The yen also strengthened Monday. In the late afternoon in Japan, the
dollar was down 0.3% on the day at 109.71 yen, off the day's low of
109.35 and not far from an eight-month low of 109.29 hit on Friday.
Monday's news on the yuan added to the market's yen-buying momentum,
traders said.

The dollar has been falling against currencies around the world during
recent weeks, a process that Washington is tacitly encouraging as a way
to narrow its gaping trade gap.

In Asia, central bankers take their cue on exchange rates from the
currencies of the region's two giants -- Japan and China. The yen has
gained sharply against the dollar this year, pulling up currencies such
as the Singapore dollar, the Korean won and the Indonesian rupiah.

Mr. Anderson says the yuan's resumed climb against the dollar "will serve
as a further catalyst" to boost other currencies around the region. "To
have all of Asia moving, including the yuan, is a big move collectively,"
he says.

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