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Wednesday, July 25, 2012 As of 10:08 PM New York 88º | 72º
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BUSINESS Updated July 25, 2012, 10:08 p.m. ET
China Shifts Course, Lets Yuan Drop
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By BOB DAVIS And LINGLING WEI
BEIJING—China's central bank is starting to guide the yuan downward against the dollarafter two years of trying to boost its value, reflecting concern in Beijing over China'sslowing economy—and risking a political fight with the U.S.
The People's Bank of China guided the Chinese currency to its weakest level of the yearon Wednesday against the U.S. dollar, the third straight day of a push to bring down theyuan's value. Overall, the yuan has fallen 1.1% against the dollar this year after rising4.7% against the U.S. currency last year.
The PBOC didn't respond to requests for comment, and it isn't clear whether the trend willcontinue in coming days and weeks. A similar steering of the yuan to weaken was seen inearly May, which was then followed by a return to the usual practice of seeking to let itremain stable or to strengthen against the dollar. On Thursday morning in China, thePBOC appeared to try to limit the yuan's recent fall.
Traders and analysts say the shift in the last few days is aimed at helping exporters copewith slowing sales and reducing the chances of major layoffs ahead of a major—andsensitive—once-a-decade Chinese leadership change set to begin later this year. A
The People's Bank of China guided the Chinese currency to its weakest level of the year. The WSJ's Hong KongBureau Chief Ken Brown tells Mariko Sanchanta why China is changing its course.
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cheaper yuan makes Chinese goods less expensive in dollar terms.
Premier Wen Jiabao last week warned that "the task of promoting full employment will bevery heavy and we must make greater efforts to achieve it."
The psychological impact of a weakened yuan"will be strong," said Dariusz Kowalczyk, aCrédit Agricole senior economist based in HongKong. "It creates an impression that Beijing is sofocused on minimizing risks to growth that it isignoring any U.S. pressure."
The U.S. Treasury declined to comment. But afall in the yuan is bound to keep it a politicalissue in the U.S. during an election year.Treasury Undersecretary Lael Brainard said lastweek that China should "avoid persistentexchange-rate misalignment," although shecredited China with making some progress onthe currency front. Republican presidentialchallenger Mitt Romney has said he would nameChina a "currency violator," a designation thatcould trigger a confrontation with China.
Meanwhile, on Wednesday theInternational Monetary Fund reiterated itscontention that China's currency is"moderately undervalued" against a
basket of currencies. The IMF didn't specify the degree of undervaluation in its annualassessment of China's economy, but individuals who track the IMF say the yuan is likelyto be judged to be undervalued by less than 10%.
China's representative to the IMF, Zhang Tao, said the IMF's characterization "is notconsistent with the reality." He said the currency is "roughly in equilibrium," meaning itdidn't have to rise much more, if at all.
Beijing has its eyes trained on not just the dollar. The European Union is China's No. 2export market after the U.S., and the yuan has appreciated 5.6% against the euro sinceJanuary. During that time, the dollar has risen 6.9% against the euro. By reducing thevalue of the yuan against the dollar, the PBOC slows its rise against the euro.
That provides some help to Chinese exporters who are feeling the effects of Europe'scontinuing debt crisis. "We've seen a sharp drop in demand from Europe," said Xu Peng,an official at Huihong International Group, a state-owned textiles company, which hasstarted to take out trade insurance to guard against potential nonpayment from Europeanclients.
The PBOC sets a daily rate, called the parity rate, for the yuan's trade against the dollarin the mainland currency market. The central bank then lets the yuan rise or fall by 1% indaily trading. Monday, the PBOC set the parity rate weaker against the dollar than Friday,according to data provider ChinaScope Financial in Hong Kong. It continued that patternthe next two days. On Thursday morning, the PBOC set the daily rate stronger againstthe dollar than the previous day.
With $3.24 trillion in foreign-exchangereserves, the Chinese government has thewherewithal to assure the continuingsteady rise of the yuan. But such a movecould be interpreted as a signal money isfleeing China.
"Authorities certainly don't want to signalany weakness," said Brookings InstitutionChina scholar Eswar Prasad. "So they willintervene very cautiously."
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Write to Bob Davis at [email protected] Lingling Wei at [email protected]
A version of this article appeared July 26, 2012,
on page A7 in the U.S. edition of The Wall Street
Journal, with the headline: China Shifts Yuan's
Course, Risking a Clash With U.S..
SmartMoney Glossary: central bank
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Reuters
The People's Bank of China guided the Chinesecurrency to its weakest level of the year onWednesday against the U.S. dollar.
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