US and Europe call to dump yuan peg - Update - Brief Article

Business Asia, August, 2003

US companies have complained to lawmakers that China's eight-year policy of fixing the yuan at a rate of 8,2770 to the US dollar gives its companies an unfair edge and fuels a current-account surplus.

The European Union and Japan have all called for China to abandon the peg, which has enabled the yuan to track the dollar's 11 per cent decline against the euro in the past year and hold down the price of Chinese-made products. US Treasury Secretary John Snow said the US would welcome a more flexible exchange rate in China and reiterated that it backs a strong dollar set in free markets.

I'm encouraged from things we're hearing from the Chinese that they're willing to look at widening their peg," Snow says. He says any change should be accompanied by reforms to the country's monetary and corporate governance systems because "those go hand in hand with moving to market exchange rates".

Should China alter its band, the Treasury official says economists expected the yuan to "appreciate some", leading to a "mixed set of effects" for US companies. The change may make it easier for the companies to sell products in China at the same time as it raises the cost of investing there and forces up prices of Chinese goods in the US, he says.

The US has stepped up its pressure on China recently, with Snow and Federal Reserve chairman Alan Greenspan both suggesting China ease its currency rules. China has ruled out any immediate change and economists have said a switch in stance risks causing political unrest and undermining its exports, incomes, labour market and banking sector. Some economists have also said the US may begin to temper its calls for change as it tries to win China's support for efforts to resolve the dispute with North Korea over that country's nuclear weapons program.