China Pledges Flexible Yuan

President Obama has praised China's decision to allow more flexibility in the exchange rate of its currency. Many U.S. lawmakers and business groups believe China's currency is undervalued, giving Chinese exports an unfair advantage. But the value of China's currency is unlikely to change much any time soon.

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China has agreed to allow the exchange rate of its currency to be more flexible. That's been a sore point with the U.S. for years. Many U.S. lawmakers and business groups believe China's currency is undervalued, which gives imports from China an unfair advantage.

Still, as NPR's Anthony Kuhn reports from Beijing, don't expect the value of China's currency to change today - or anytime in the near future.

ANTHONY KUHN: Beijing was expected to announce a currency revaluation back in April, but then the euro tanked and the decision was put off. Patrick Chovanec, a professor of business at the Tsing Hua University School of Economics and Management in Beijing, says that Saturday's announcement was timed to keep China's leaders out of the hot seat at the G-20 Summit in Toronto next weekend.

Professor PATRICK CHOVANEC (Business, Tsing Hua University School of Economics and Management): By taking this action now - in words right now, hopefully in deeds later - they take that off the front burner of the G-20, and there's a chance that the G-20 can have a much more productive meeting.

KUHN: China de-pegged its currency, the yuan, from the dollar, in 2005. It re-pegged it in 2008 in order to protect Chinese exporters from the recession, and as part of a larger economic stimulus package.

Shang-Jin Wei, director of the Chazen Institute of International Business at Columbia University in New York, says this weekend's announcement signals a return to the pre-recession status quo.

Dr. SHANG-JIN WEI (Director, Chazen Institute of International Business, Columbia University): Now, the country is more confident about the recovery of the Chinese economy, also the world economy, so that it can afford to withdraw stimulus measures, so de-pegging from the U.S. dollar. In the central bank's view, it's part of the exit strategy from the stimulus measures.

KUHN: Wei notes that even though the yuan gained 20 percent against the dollar from 2005 to 2008, it did little to slow the growth of Chinese exports. Markets in Asia jumped today. They fell back briefly when the yuan opened at 6.8 to the dollar, right where it was last week.

Shen Minggao is Citibank's chief economist for the greater China region. He's based in Hong Kong. He predicts the yuan will make minimal gains this year.

Mr. SHEN MINGGAO (Chief Economist for the Greater China Region, Citibank): Our forecast is that by the end of the year, the Chinese currency could gain about 2 percent over the dollar. So it's a gradual process. Another reason that I think we don't see any movement today for the Chinese currency is that the government is still cautious about the economies, and also about a weaker euro.

KUHN: The policy shift didn't impress China's critics in Congress much. New York Senator Charles Schumer said he would press ahead with legislation to levy tariffs against Chinese exports.

Tsing Hua University's Patrick Chovanec says Beijing's move will give most lawmakers a bit more wiggle room.

Prof. CHOVANEC: Members of Congress are going home to run for re-election, and they want to have a story to tell. And until Saturday evening, they had no story to tell. They basically said, we put the pressure on China, and China didn't do anything.

KUHN: Treasury Secretary Timothy Geithner, meanwhile, has tried to persuade China that a stronger yuan is in its own interest, because it helps cool inflation and encourage domestic consumption. China's central bank used the same arguments over the weekend, perhaps to defend against domestic criticism that Beijing was caving in to foreign pressure.

Anthony Kuhn, NPR News, Beijing.

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