Currency change to create ripple effect
Associated PressPublished July 23, 2005
BEIJING - The losers: Chinese textile manufacturers and foreign shoppers who snap up cheap Chinese goods. The winners: Chinese tourists, Australian farmers and perhaps eventually, the U.S. factory worker.
The effect of China's decision to cut its currency's tie to the U.S. dollar will reverberate through the world economy in ways that are still being analyzed.
In its first day of trading under Beijing's new, murky foreign exchange scheme, the yuan barely budged from its new opening rate of 8.11 to the dollar, about 2 percent higher than its government-set rate over the past 10 years.
But over time, analysts predict the yuan will slowly appreciate, pushing up the price of Chinese exports and offering relief to foreign companies trying to compete with low-priced Chinese exports.
Throughout Asia, the change is a boon to hotels, factories and farmers whose goods are suddenly slightly cheaper compared to China's and could be more attractive to increasingly well-off Chinese consumers.
The biggest immediate benefit could be felt in countries such as Malaysia and Indonesia that compete with China to sell appliances, textiles and other low-tech goods, said David Cohen, regional economist for Action Economics in Singapore.
"They'll be under less competitive strain," Cohen said. "Everyone is breathing a little sigh of relief."
The reform, announced Thursday by the Chinese government, involves cutting the yuan's peg to the dollar and switching to a more flexible system based on a basket of foreign currencies.
"The reform is indispensable in the country's pursuit of a more mature, sophisticated market economy," the official China Daily newspaper said Friday.
Each trading day, the yuan will be allowed to move against the currency basket within a 0.3 percent band on either side of the previous day's closing price, which could allow it to slowly weaken or strengthen over time.
But much of the new system remains a mystery, including the identity of the currencies that will be combined to determine the yuan's value, and their proportions.
In China, the biggest losers from a strong yuan are likely to be makers of textiles, furniture and other low-profit goods, though economists say China still has strong competitive advantages because of its low wages, huge labor force and growing domestic market.
"The appreciation of the yuan will hurt all exporters," said Gao Peikun, general manager of Beijing Garment Export & Import Co.
The company says its $180-million in foreign sales last year - one-third of that to the United States - made it China's 38th-biggest exporter.
"The only thing we can do is to try to readjust our product structure, selling more high-grade products instead of lower-grade goods," Gao said.
Abroad, consumers who rely on China for bargain-priced shoes, clothes, sporting goods and appliances will see prices edge upward. Retailers could see higher wholesale prices cut into profits.
But Chinese factories also will benefit from lower prices for imported oil, steel and other raw materials.
Foreign commodity producers such as Australia hope to cash in. On Friday, Australia's stock and currency markets rose on expectations that Chinese consumers can afford to buy more Australian wheat and other crops.
"The Australians were quite pleased," Cohen said. "If you're a commodity supplier, that's just more demand."
Profits for Chinese airlines could rise as fuel prices fall in yuan terms. Travel agencies could see a surge in Chinese tourism to foreign countries that are suddenly cheaper.
In Hong Kong, stock prices for hotels, department stores and real estate developers were expected to rise on expectations the territory will attract more mainland Chinese visitors.
Hong Kong is a Chinese territory but has its own currency, which local authorities said would keep its link to the U.S. dollar, holding it steady as the yuan rises and making prices fall relative to China.
The United States and China's other trading partners have pushed Beijing for years to let the yuan rise, claiming it was undervalued by up to 40 percent and gave Chinese exporters an unfair advantage.
Economists say the direct effect on the huge U.S. trade deficit with China - a record $162-billion last year - should be limited.
But in the longer term, U.S. officials hope a rising yuan will help struggling American manufacturers, which have lost 3-million jobs since mid 2000.
Because U.S. products will be more competitive, more U.S. factory workers may keep their jobs in the coming years, said Mark Zandi, chief economist at Economy.com, a forecasting firm.
"The winner in all of this," he said, "will be American businesses and ultimately U.S. workers."