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Yuan's value continues to create controversy

January 26, 2006

2 Min Read
Yuan's value continues to create controversy

The market, and not his government, controls movement in the currency exchange value of China''s currency, according to a Bloomberg News interview of People''s Bank of China (BOC) Assistant Governor Ma Delun. At issue is not in fact fluctuation but the lack of it in the currency''s value; since last July when the BOC stopped pegging the yuan''s value to the USD and instead valued it against a basket of 21 currencies, the yuan has risen just 0.5% in value against the USD. Other Asian currencies have climbed 3-5% in the timeframe. Foreign critics argue the low valuation hampers manufacturers'' efforts to import into China.

On Jan. 5 the BOC noted at its 2006 Work Conference in Nanchang that this is the last year of the transitional period allowed under China''s agreement with the World Trade Organization; starting in 2007 the country must follow WTO mandates to the letter. The Bank''s goals for this year include improving "the managed floating exchange rate regime following a self-initiated, controllable and gradual way with a view to enhancing the fundamental role of market in the formation of RMB exchange rate and maintaining RMB exchange rate basically stable at an adaptive and equilibrium level," according to information at the BOC website.

Ma Delun''s comments in the Bloomberg article contradict accusations of currency manipulation voiced by some, including U.S. Senators Charles Schumer and Lindsey Graham. The two are pushing for legislation to impose tariffs on Chinese imports unless the yuan''s value is allowed to appreciate more rapidly.

BOC says China''s foreign exchange reserves were $818.9 billion at the end of 2005, a 34.3% increase over 2004. The country''s trade surplus was more than $100 billion in 2005, according to China''s Ministry of Commerce. The U.S. trade deficit with China was about $190 billion last year, a 20+% increase over the balance in 2004,which itself was 30+% higher than 2003. U.S. Treasury Secretary John Snow said in early January, and in repeated interviews since, that the currency exchange value of China''s currency did not yet reflect its economic strength.

Ma said currency policy wasn''t to blame for the U.S. trade deficit. "Workers'' pay in China is 1/33rd of that of a U.S. worker," Ma said in the Bloomberg interview in Shanghai on Jan. 18. "The U.S. has to accept this global reallocation of industries."

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