US Conditionally Optimistic On China's Currency Move

By J.J. McGrath | April 15 2012 8:15 PM

China's decision to widen the daily trading band for its exchange rate, if implemented in a way that allows the value of the exchange rate to reflect market forces, could contribute [to trade] rebalancing, which would be positive for China, the United States, and the global economy, a U.S. Treasury Department official told Reuters on Sunday.

REUTERS/Stringer

An investor reads a newspaper with a magnifying glass in front of an electronic board showing equity information at a brokerage house in Huaibei in China's Anhui province on April 5. The People's Bank of China announced on Saturday that it is widening the floating band of the renminbi's trading prices versus the U.S. dollar in the interbank spot foreign-exchange market to 1 percent from 0.5 percent, which could ultimately have an effect on stock prices.

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The People's Bank of China announced on Saturday that it is widening the floating band of the renminbi's trading prices versus the U.S. dollar in the interbank spot foreign-exchange market to 1 percent from 0.5 percent. The primary unit of the renminbi is the yuan.

Effective Monday, the central bank said this means the trading prices of the [renminbi] against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of [plus or minus] 1 percent around the central parity released on the same day by the China Foreign Exchange Trade System.

According to the Treasury Department official quoted by Reuters, [W]e welcome the progress to date, [but] the process of correcting the misalignment of China's exchange rate remains incomplete, and further progress is needed.

Meanwhile, the Treasury Department announced on Friday that it will delay publication of the semiannual Report to Congress on International Economic and Exchange Rate Policies of major trading partners -- China among them -- so that progress may be assessed following several international meetings. The department published its last semiannual report on Dec. 27.

U.S. exporters have long argued the foreign-exchange relationship between the world's two largest economies has resulted in a comparatively overvalued dollar and a relatively undervalued renminbi, which has given China an unfair trading advantage. Policymakers also have blamed this relationship for the loss of millions of American manufacturing jobs.

At the market close on Friday, $1 was worth 6.3038 yuan, and one yuan was worth $0.1586.

Joseph Stiglitz, winner of the Nobel Memorial Prize in Economic Sciences in 2001, had an interesting take on the move made by Chinese officials on Saturday, Bloomberg News reported.

Opening up the band in conjunction with other actions they've taken may lead to a fall in the exchange rate rather than appreciation, Stiglitz said in Berlin, where he is attending an economics conference. To the extent they do open up, money may leave -- and that will weaken their currency. A free market exchange rate may not go in the way the U.S. thinks it should.