Dollar Slips Below 7-Yuan Barrier

Dollar Slips Below 7-Yuan Barrier
China's Currency Rises as Beijing Loosens Its Grip

By JAMES T. AREDDY
April 10, 2008

SHANGHAI -- China's currency breached a new milestone Thursday, as the U.S. dollar bought less than seven yuan for the first time in over a decade and as Beijing increasingly permits its exchange rate to reflect the continued power of its economy.
At the start of foreign-exchange trading in Shanghai, the People's Bank of China set the day's reference rate for the U.S. dollar at 6.9920 yuan compared with the closing exchange rate of 7.0017 yuan in the previous session. The central bank strictly controls the market and permits the dollar-yuan exchange rate to fluctuate 0.5% above and below that daily reference rate.
China's yuan has accelerated upward in recent months, gaining 4.5% so far this year against the U.S. dollar after pushing 7% higher in 2007.
"It's a normal trend based on economic theory," Ji Zhu, a global economics professor at Beijing Technology and Business University. China's economy is growing at double digits, while the U.S. is in the midst of a slowdown, he notes.
In July 2005, Beijing bowed to economic pressures at home and global calls to loosen its grip on the currency, ending a decade of locking the exchange rate around 8.28 yuan. Initially, further gains came slowly, as the authorities stressed the importance of building a functioning foreign-exchange rate system -- and brushed off threats of trade sanctions from the U.S. Congress and global trading partners. It took until May 2006 for the yuan to break the barrier of eight to the dollar.
Now, a stronger Chinese currency is considered an antidote to the growing inflation the world's fastest-growing major economy is experiencing, since it reduces the cost of importing commodities like crude oil that are critical to maintaining the pace of growth.
Yet the rising yuan is also a headache within China. It makes the country's exports more expensive to overseas buyers -- particularly Chinese companies that produce price-sensitive products that complain they are being hurt by the trend. There is also a widespread view among economists and China's own people that the yuan remains undervalued, which continues to encourage enthusiastic investment into assets such as real estate, based largely on hopes that as the yuan rises further, the assets themselves will be valued higher -- even if other factors suggest prices have become too high.
While the U.S. has continued to pressure Beijing to allow the yuan to rise, Washington is also concerned that the falling dollar might discourage China from accumulating Treasury bonds at a critical time for the U.S. economy.
U.S. Treasury Secretary Henry Paulson, who has tried face-to-face dialogue, rather than threats of sanctions, to encourage Beijing to liberalize the currency system, was in China earlier this month amid predictions the dollar would soon buy less than seven yuan. After meeting China's president, he noted the movement, telling reporters: "I acknowledged to President Hu (Jintao) the very material progress that they've made with their currency because they have a currency that more accurately reflects underlying economic fundamentals."