China moves to more flexible currency policy

BRENDAN TREMBATH: Many things are made in China these days and the value of its currency is a hot topic.

For two years Chinese authorities have prevented the currency, the yuan, from strengthening against the US dollar. It makes it harder for US manufacturers to compete against Chinese imports.

But over the weekend China’s central bank flagged it would allow market forces to play a greater role in influencing the yuan’s value.

The move came yesterday and is seen as positive for global growth and for economies like Australia which are big exporters to China.

More from business reporter Scott Alle.

SCOTT ALLE: When the People’s Bank of China announced at the weekend it was revaluing its currency, there was great anticipation.

But come Monday there was no variation of the reference point against the US dollar. It stayed at 6.83 yuan where it was unofficially pegged during the global financial crisis to protect Chinese exporters.

But the long awaited tweak finally came yesterday, with the yuan strengthening to 6.79 against the greenback.

TONY MORRISS: It’s only 0.25 per cent but it is a very significant move allowing far wider trading and you would expect the way that the wording of the statement and the way that the market is priced right now, that China will be allowing a very gradual and moderate further appreciation of the yuan over time

SCOTT ALLE: Tony Morriss is senior market strategist at ANZ. He agrees Beijing’s decision to allow the yuan to rise in value against a basket of currencies is adroit political timing ahead of this weekend’s G20 summit in Toronto.

TONY MORRISS: But it is a very positive step. At least it’s moved. It takes the yuan, the currency peg, off the agenda at the G20.

SCOTT ALLE: For months the calls to let the currency appreciate had become increasingly strident, mainly from Washington but also from the IMF (International Monetary Fund) and the World Bank.

US Treasury secretary Timothy Geithner flew to Beijing for a secret tarmac meeting with top Chinese officials to try and defuse the issue and to head off a push in Congress to bring in barriers to Chinese competition.

The arguments mounted by some representatives of US manufacturers being that by holding the yuan artificially low since July 2008, Chinese companies have gained an unfair advantage over their competitors.

But China was only going to move on its currency when it deemed conditions were most favourable for it to do so.

NICHOLAS LARDY: It’s a good move for China in terms of its own domestic economy, its own self interest and if it’s done right going forward it will also help diffuse some trade tensions, head off trade wars. So it’s a win-win for China both domestically and internationally.

SCOTT ALLE: Nicholas Lardy is senior fellow at the Peterson Institute in Washington. He told Bloomberg there are a number of advantages for China arising from a more flexible exchange rate.

NICHOLAS LARDY: So this’ll help on the inflation front, it’ll help on the structural adjustment that they’ve wanted now for several years; less investment going into the export sector, more to satisfy domestic demand.

SCOTT ALLE: The reasoning is a stronger yuan can help boost domestic demand through the purchasing power of some 250 million middle-class consumers, as President Hu seeks to strengthen household incomes.

There are also benefits as a buffer against inflation, a very real concern for central bank policy makers with growth estimated to top 10 per cent this quarter.

But economists argue letting the currency appreciate is just one tool for shifting the world’s third biggest economy from relying on exports for growth to domestic consumption.

Qu HongBin is chief China economist at HSBC.

QU HONGBIN: There are many ways for them to do that. I think the most important way is basically for them to, for the government to put more resources into the social welfare system so that the people can review, can allow their precautionary saving. That’s the most important kind of inner ways for China to boost the consumption.

SCOTT ALLE: The news that China was shifting its currency policy is also seen as a shot of badly needed confidence in global economic growth.

And as Tony Morriss, senior market strategist at ANZ notes, countries such as Australia that export heavily to China stand to benefit.

TONY MORRISS: The argument as well is that this increases the purchasing power of a lot of Chinese entities and so while prices of a lot of our commodities have risen so sharply, this means there’ll be sort of a stronger longer demand for our commodities going forwards.

SCOTT ALLE: Currency analysts predict Beijing will probably let the yuan rise between 3 and 5 per cent by the end of the year, but as evidenced by the past few days the pace will be gradual.

BRENDAN TREMBATH: Business reporter Scott Alle.