China Loosens Grip On Currency, But Doubts Remain

China gave world financial markets a boost Monday with a surprise announcement that it was, in effect, dropping the yuan's two-year, unofficial peg to the U.S. dollar. Stock markets climbed higher just about everywhere but the U.S. China's move gave rise to speculation that China is finally giving in to pressure from abroad to let its currency appreciate. Many China watchers, though, aren't so sure.

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China announced this weekend that it would allow its currency to appreciate against the dollar. And that appears to have helped diffuse friction between Beijing and its major trading partners, including the U.S. But some economists say the long-term impact may be less than U.S. officials are hoping for. NPR's Jim Zarroli reports.

JIM ZARROLI: Over the years, China has pegged the value of its currency, the yuan, to the U.S. dollar. Chinese officials were worried that if they didn't do that, the yuan would appreciate, making the country's exports more expensive.

The policy angered China's trading partners, especially the U.S., who say it gave Chinese companies an unfair advantage over exporters in other countries. Sam Stovall, chief investment strategist at Standard & Poor's, says the announcement this weekend that Beijing would let the yuan fluctuate somewhat should benefit American companies.

Mr. SAM STOVALL (Chief Investment Strategist, Standard & Poor's): They would likely benefit from this not necessarily because they could export more to China but rather that they would be able to be more competitive globally.

ZARROLI: Stovall says the fact that China is willing to loosen its dollar peg is a mark of confidence in the world economy, and stocks responded positively around the world today.

But as the afternoon wore on, U.S. stocks fell, as investors seemed to reassess China's move. The move came days before the big meeting in Toronto of the G-20, the world's biggest economies. Eswar Prasad, professor of economics at Cornell, says if nothing else, China's move has important symbolic value.

Professor ESWAR PRASAD (Professor of Economics, Cornell University): It will take the pressure off China in the sense that it'll be very difficult for the U.S. congressmen to move forward with legislation that is punitive against China because after all, China has agreed to make its exchange rate more flexible.

ZARROLI: But China gave few details about when the yuan would fluctuate and by how much, and there are those who say the move may not be as beneficial to U.S. companies as it seems. Prasad says instead of pegging its currency to the dollar, China will go back to what it did between 2005 and 2008: It will tie the yuan to a basket of currencies, including the euro. And since the euro has been losing so much value in recent weeks, Prasad says that could make the yuan weaker, which would actually make China's products cheaper.

Mr. PRASAD: The fact is that by just talking about a basket of currencies, they have created room for themselves to allow the currency to move either up or down. So he gives them a fair amount of wiggle room.

ZARROLI: Since Beijing isn't very transparent about its economic decisions, there's no way to tell for sure what its real intentions are and whether it plans to revalue its currency in any significant way.

The head of the Alliance for American Manufacturing issued a statement today saying: I'll believe it when I see it.

Still, this weekend's announcement mollified China's trading partners, at least temporarily, and is likely to ease some of the tensions at this weekend's summit.

Jim Zarroli, NPR News, New York.

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