Chinese Currency Move Draws Mixed Reviews

Many call it a deft move by Chinese officials: the government announced this week it would revalue its currency, the yuan, by a scant 2 percent. Some U.S. manufacturers welcome the news, while retailers and politicians are not as happy.

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LIANE HANSEN, host:

This past week, China revalued its currency, the yuan. China's major trading partners had all been calling on Beijing to act. Most observers say the yuan has been undervalued for years, but no one can agree on how much. The yuan was allowed to appreciate 2 percent, a small amount, which probably won't do anything to offset the huge trade deficit the United States runs with China, but the Bush administration welcomed the move. Joining us to discuss what all this might mean is NPR's Adam Davidson.

Adam, the Bush administration was pleased about the move, but this revaluation is very small. So what's going on?

ADAM DAVIDSON reporting:

Well, it is small, but it's the first move China has made in about a decade. So even a small move has huge political implications. It shows that China is ready to address the currency imbalance that many have called on it to look at. Also, China set up a system, a new system, that allows it to revalue every day if it chooses to, if the central bank decides to. So many people are hoping that with this new system, China won't wait another decade to revalue their currency but will continually revalue their currency responding to market pressures.

HANSEN: Elaborate a little bit on why the administration has been so insistent that China make the move.

DAVIDSON: Well, you mentioned the trade imbalance. There is this huge trade imbalance with China, over $100 billion a year, and there's a feeling that the Chinese central government has kept the yuan valued less than it should be, which effectively makes Chinese products that are shipped to the US cheaper than they would be otherwise. And so we've been buying more Chinese goods than maybe we should be. They've been buying fewer American goods because with the undervalued yuan, American goods are more expensive. So people in the administration, people in Congress, people in the business community have said that without a revaluation, the trade imbalance will just continue to grow and grow.

HANSEN: Now you mentioned the Bush administration is happy with the move, but what about Congress? What about members of the business community? Are they as happy as the administration is?

DAVIDSON: It's a really mixed picture in the business community. Congress is, for the most part, quite upset with this move. Congress has been sort of the attack dog, the bad cop to the Bush administration's good cop in negotiations with China. Many in Congress feel that there should have been a 10-percent, 20-percent, even 40-percent revaluation of the yuan, and just 2 percent is nowhere near enough. One congressman said to me it's really an insult to the American people. He said that Congress is likely to give Beijing until the fall to make some more substantial revaluations, but if they don't, then Congress is really going to attack them even stronger than before.

In the business community, it's really mixed. People who export things to China, manufacturers in the US, wanted a much bigger revaluation because again, they're hurt by a cheaper yuan. But retailers--Wal-Marts, Home Depots, those kinds of folks--and multinational corporations, people who make--the American companies who make things in China and then ship them to the US, they all benefited under the old system because their products were cheaper in the US. And so they aren't too eager to see China move too much. So while Congress seems to have strongly sided with the domestic manufacturers and the labor unions in favor of a revaluation, the Bush administration has tried to balance those two forces and try and work out a compromise.

HANSEN: Explain what difference this might make to people, for example, who aren't going to be visiting China.

DAVIDSON: Well, 2 percent, which is the revaluation they made this week, is very little and isn't likely to make much of a big change. But if this does indicate a new system in which China continually revalues its currency and if the currency does appreciate by 20 percent or 30 percent as many economists say it will, then there'll be a lot of impacts. One is that goods from China will be more expensive. Things you buy in Wal-Mart will be more expensive. Consumer goods, toys, DVD players, these kinds of things, will cost a little bit more. And then another impact is that to maintain its currency regime in the old way, China was buying a lot of US Treasury bills. What this means is that it kept long-term interest rates down which means mortgage rates down. So actually, this move, if China is more aggressive in revaluing their yuan, is very likely to cause an increase in mortgage rates, and that certainly will affect a lot of people.

HANSEN: NPR's Adam Davidson. Adam, thank you very much.

DAVIDSON: Thank you.

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