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Last Updated: Thursday, 28 August, 2003, 06:47 GMT 07:47 UK
Pressure mounts on China's yuan
Yuan
The yuan could be 40% undervalued, some say
Concern is mounting that the Chinese currency, the yuan, may be misaligned, threatening the stability of the global economy.

US Treasury Secretary John Snow is to travel to Beijing next week to express his government's concern that the yuan may be dangerously undervalued.

On Wednesday, the US National Association of Manufacturers (NAM) argued that the dollar was 15% overvalued, and particularly blamed the cheap yuan for causing job losses in American factories.

The yuan is pegged at about 8.3 in the dollar, a rate the NAM said was up to 40% undervalued, giving China's exporters an unfair advantage and making its imports expensive.

Many economists argue that China should allow the yuan to float freely on international markets, or at least should rethink the value of its dollar peg.

Money, money, money

The obvious sign of the undervaluation of the yuan, say observers, is China's swelling national accounts.

John Snow
Mr Snow faces an anti-China lobby at home
The country's dramatic success in export markets has made it a magnet for foreign currency; in July alone, its foreign-exchange reserves jumped $10bn to almost $360bn.

At the same time, the US has started to record a gigantic trade and current-account deficit with regard to China, something that has aroused considerable political anger.

The situation is analagous to the 1980s, when a similar external position with then-booming Japan sparked a flurry of complaint.

This time, the problem is more widespread: although China is the biggest target, US manufacturers see most major Asian currencies are undervalued.

No complaints here

There are few signs that an appeal from Mr Snow will have any effect in Beijing, however.

Shopping for computers in Beijing
The yuan has underpinned China's boom
Within China, there is little complaint or comment about the exchange rate.

Indeed, most Chinese firms and policy makers have welcomed the cheap yuan, seeing it as helping to underpin the country's long economic boom.

Despite its increasing involvement in international agencies such as the World Trade Organisation, China is still reluctant to fall into line on economic policy.

And some independent economists have said that China would be rash to let the yuan float too soon.

Freeing the exchange rate would necessitate sweeping monetary liberalisation, which would almost certainly result in an influx of speculative investment capital - the sort of "hot money" that helped cause the pan-Asian financial crisis of 1997-98.




SEE ALSO:
Second minister quits in HK crisis
16 Jul 03  |  Asia-Pacific
Chinese growth slackens after Sars
17 Jul 03  |  Business
HK delays anti-subversion bill
07 Jul 03  |  Asia-Pacific
HK rally for more democracy
13 Jul 03  |  Asia-Pacific
HK's scandal-hit finance minister
16 Jul 03  |  Asia-Pacific
China's factory belt defies Sars
19 May 03  |  Business
China: the world's factory floor
11 Nov 02  |  Business


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