China Currency Act Cheers Markets But Doubts Remain : The Two-Way China's currency move cheered world financial markets but doubts remained about how far officials there would allow their currency to strengthen.
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China Currency Act Cheers Markets But Doubts Remain

A bookstore vendor counts Chinese yuan in Chengdu in Sichuan province, China on Monday, June 21, 2010. Anonymous/COLOR CHINA PHOTO hide caption

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China's surprise move over the weekend to allow its currency to strengthen was cheered by world financial markets Monday despite the many uncertainties that remained about just how far the Chinese government would permit its currency to rise.

China's action had the immediate effect of boosting the yuan at the start of the work week to its highest level against the dollar in two years.

But there remained much skepticism about where it would end. A major tenet of China's economic policy has been to keep its currency relatively low, especially against the dollar, in order to keep its exports relatively high.

That strategy has allowed China to provide employment for millions of Chinese who otherwise might not have been working and to thereby keep a lid on social ferment in the nation.

Still, China's currency move was an improvement, at least in the eyes of officials in the U.S. and elsewhere, who have complained that by keeping the yuan artificially low, the Chinese were harming everyone else's competitiveness.

NPR's Jim Zarolli reported on the reaction to China's ostensibly new currency strategy on All Things Considered.

From his report:

JIM: Sam Stovall, chief investment strategist at Standard and Poor's, says the announcement this weekend that Beijing would let the yuan fluctuate somewhat should benefit American companies.

STOVALL: 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.

JIM: 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 reassessed China's move. The move came days before the big meeting in Toronto of the G-20... the world's biggest economies.

Eshwar Prasad, professor of economics, at Cornell says if nothing else, China's move has important symbolic value.

PRASAD: It will take the pressure off China in the sense that it will be very difficult for 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.

JIM: 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 Chinese products cheaper.

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

Since Bejing 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.