Analysis Materials 25 July 2005 11:08 (UTC +04:00)

For the first time over past 10 years China revaluated its currency - yuan. In accordance with the new rules, yuan will be connected not only with dollar but, different currencies simultaneously, the People’s Bank of the country announced. However, the announcement does not contain concrete currencies, which the yuan is connected to. For its essence, it consolidates the rate of yuan in regard to U.S. dollar by 2.1% to 8.11. According to Business Week, during the Friday auction the rates of yuan passed this point and was fixed at $8,277 per dollar.

The most world countries complained of artificial cut in exchange rates, which gives considerable priority to Chinese exporters.

The United States, which still accuse China of the U.S. producers’ problems, more actively spoke on this topic.

So, the revaluation of yuan might become the first step in full liberalization of exchange rates of currencies in China.

Stubborn yuan

China fixed yuan-dollar rate in 1994 and China has had to control its interest rates since then through he People’s Bank. Such a policy by the Chinese Central Bank is quite understandable. The countries which find difficult to achieve economic rise or increase of the growth pace of through different measures and which cannot establish quickly efficient market institutions, the maintenance of the national currency lower than the parity of solvency turn out the least available mean for enhancing rise.

The cumulative surplus for 2005 is now nearly $40 billion, more than for the whole of last year. America has long argued that China artificially pegs the yuan below its true market value, so as to give Chinese exports an unfair advantage. The US deficit in trade with China within year might exceed $150bn.

In May US Treasury Secretary John Snow said the yuan's fixed rate of exchange against the dollar risked unbalancing world trade. In June US Federal Reserve chairman Alan Greenspan has added his weight to calls for China to allow the yuan to trade freely against other currencies. Speaking to a conference of central bankers in Beijing via satellite video link from Washington, Mr Greenspan argued that China would also benefit from liberalising the yuan's exchange rate. Mr Greenspan added that China's current system hurt the Chinese economy because it promoted inefficiencies

China has revalued its currency, the yuan, for the first time in a decade, in a move that could placate criticism from abroad, especially the US.

The new rules scrap the yuan's peg to the dollar, and tie it to a basket of currencies, the central bank said.

Wei Benhua, deputy administrator of China's State Administration of Foreign Exchange, told a conference in Beijing that US criticism of China's exchange rate policy was "unfair".

"We cannot accept that," he said.

"We do have a surplus with the United States. However we also have (trade deficits) with many of the European countries and also with the Southeast Asian region. "So how do you manipulate your currency just to get a surplus with the US?" However, yuan was revalued unexpectedly.

Chinese wisdom

One might suppose that the Chinese authorities chose the revaluation of yuan basing on internal economic problems and slight U.S. pressures. China’s big problem is the overheating of economy. Thanks to administrative measures taken over the past few years the government succeeded to cool economy.

Thus, in the day hours official statistics stated on 9.5%-rise in economy in the second quarter of 2005. The growth pace turned lower than the same figure of 2004. industrial production grew 16.8%, while investments in asserts вЂ" 25.4%. The growth pace industry and investments turned out lower than 2003, while it is still strong.

In fact, as some experts urge, the Chinese economy becomes slow in more rapid rates than the official statistics. Judging with physical indicators, such as energy consumption, growth pace of the GDP should fall to 8% in 2006. The leading indicators are profit margins, product prices and property prices, which forecast corporate cash flow or ability to borrow.” These three indicators are slowing. For the past five years, Chinese industrial firms have enjoyed record profit margins as revenue growth has outpaced the increase in wages and raw-material costs. In 2003 and 2004, industrial production and sales grew at an annual rate of nearly 30% in real terms, analysts estimate, but in 2005 the pace has slowed to around 15%. With commodity prices high, companies' margins are being squeezed: overheated industries such as cars, steel, cement and basic materials are suffering especially.

The property prices in China became stabilized after the unusual rise period. Thus, prices of apartments in Chankhai dropped 10-20% from mid-April.

However, the Chinese, is not going to get satisfied with the current deceleration of economy. It seems to take measures not to allow next heating in of economy in future. Expenses for preparations for Olympic Games 2008 to be held in Beijing, can entail rise in investments and put the economy in a new inflation spiral. The establishment of reserves could weaken the negative effects of the coming investment boom.

It is a paradox that China gradually becomes a victim of its growing success in the international arena. Till recent time China was an active locomotive of the world economy, being a fast-growing netto-importer of products of heavy industry. The reverse tendency occurs today: China becomes a netto-exporter of not only textile, but also steel, different metals and chemical substances. It occurs amid rapid rise of export. Thus, in June export by China grew 30.6%, whereas import rose only 15.1% as compared to last year. The slow import actually presents bad information for the international companies, which delivers products to China. On the other hand they are met with aggressive export expansion of Chinese companies in the markets of different countries Thus, China jeopardizes de-stimulating the economic rise and de-stimulating its own growth.

Transition to floating rate might make China more vulnerable to possible world currency crisis. However, the country is preserved by huge gold and currency reserves, which comprise $750bn.

Outcomes for world

Undoubtedly, the majority of developing and industrials countries of the world can take a deep breathe due to a delay in the Chinese export. The developing countries will hope on export of more commodity to the western states. The governments of industrial countries can get relieved from part of a pressures made by the producers and workers, who challenge strengthening the protection measures against the Chinese import. The results of revaluation of yuan can be of dual kind. Firstly, they can cut deficit in trade with China and secondly, the revaluation of yuan will make the Chinese investments in the U.S. state bonds less profitable, making the authorities to transfer the money into asserts nominated in different currencies, for ex., in euro. The last is probable to lead to sharp fall in rates of U.S. dollar and rise of considerable problems for the U.S. government in attracting capital needed for covering trade deficit.