China’s currency move has little near-term impact for US trade

21 June 2010 23:31  [Source: ICIS news]

WASHINGTON (ICIS news)--China’s decision to allow more flexibility in the exchange value of its currency - the yuan - will have little near-term impact for US manufacturers, but it may have positive longer-term impact on trade, private industry sources said on Monday.

The move on Saturday by the People’s Bank of China (PBC) to adjust the yuan’s exchange rate and make it more flexible was seen by many as a positive if modest step toward resolving the long-running dispute between China on one side and the US and other trading nations on the other.

The US has long charged that China kept its currency significantly undervalued, a policy that aided Chinese manufacturers because it made their products cheaper and easier to market in the US and other major consuming nations.

But the low-valued yuan also meant that US exports - and those of other major industrialized nations - to China were more expensive and not competitive with domestically-produced goods in the Middle Kingdom.

The disparity between the openly traded US dollar and the under-valued yuan led to a huge trade imbalance between China and the US in China’s favour.

In Saturday’s PBC announcement, the Beijing government indicated that it would “de-peg” the yuan from the US dollar, allowing the yuan to appreciate slowly.

But US manufacturing interests said the shift in Beijing’s currency policy was not likely to have any near-term impact for US-China trade.

“This does nothing for the flow of trade right now,” said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers (NAM).

Vargo noted that in the wake of the Bank of China’s announcement, the yuan had appreciated by about 0.5% against the US dollar, not a significant change.

“That’s not much of a shift,” Vargo said. “In terms of having effect on trade, we have member companies telling us that if the yuan moved by 5% or 10%, it would mean something - but others say they’d have to see a 20% appreciation before it would mean much.”

The National Association of Manufacturers is the oldest multi-industry trade group in the US, and its 14,000 member firms include chemical, resins and plastics manufacturers.

Vargo and other observers said the shift in China’s currency policy was timed to help take pressure off the Beijing government in advance of the 26-27 June summit meeting of the G-20 nations in Toronto, Canada.

The G-20 group is made up of the 19 major economies of Asia, the Americas and the Middle East plus the European Union.  Together, those nations account for 80% of global trade and two-thirds of world population.

The US, said Vargo, had long pressed China to allow the yuan to float freely in world currency markets, a move Beijing resisted for fear it would undermine China’s fast-developing economy and trigger social unrest.

“But the G-20 also have made it plain that China’s undervalued currency is affecting the rebalancing of trade worldwide,” Vargo said, “so Beijing was going to come under a lot of pressure over this issue at the G-20 summit at the end of this month.”

The weekend shift in China’s currency policy will help take some of the heat off the Beijing government’s representatives at the summit in Toronto, Vargo said, “but no way is it going to be enough to take the yuan issue off the table at the G-20.”

He said the other G-20 nations might press Beijing for still further easing of central bank support for the yuan. Whether China agrees remains to be seen.

Vargo said that if the Beijing government resists making any further adjustments to its currency policy, members of the US Congress likely would press for legislation that would allow US companies to file countervailing duty claims - basically a tariff penalty on foreign government trade subsidies - against imports from China.

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