Yuan Sinks Ahead Of Meeting With US
China's currency fell by its single largest margin on record against the dollar after dealers bet that China's central bank might use a weaker yuan to help support economic growth.
Dealers raced to price in the depreciation expectations after an unexpectedly sharp change in the official daily reference rate for dollar-yuan trading. Monday's big drop follows signs that the slowdown in China's economy is intensifying. Two separate purchasing managers' indexes, which gauge business activity, showed a decline to record lows.
Allowing the yuan to weaken significantly against the dollar could help exporters, which have been battered by the Chinese currency's appreciation as well as by slumping global demand and rising costs. Strength in exports thanks to a devalued yuan could also help mitigate rising unemployment in China, which could help avert social unrest.
But a sharply devalued yuan would be risky for China, potentially aggravating trade tensions with the U.S. and Europe, and increasing the prices of many imported goods in China. That could crimp domestic spending power at a time when Beijing says it wants to shift its economy toward domestic consumption.
Still, analysts caution against making too much out of one- or two-day movements in the yuan.
Beijing's exercise of heavy control over the yuan's value has been a political hot button, and Monday's move comes ahead of a twice-annual U.S.-China economic summit that begins Thursday in Beijing. The exchange rate has been a central topic in past sessions of those talks, the Strategic Economic Dialogue, with Washington arguing that the yuan is undervalued and urging Beijing to let the market determine its value.
David McCormick, undersecretary of the Treasury for international affairs, said the Bush administration isn't worried that the yuan's recent declines against the dollar are a sign of Beijing backtracking on its commitment to relax its grip on the currency.
'We've had no indication . . . that they are any less committed to this agenda than they have been in the past,' Mr. McCormick told reporters ahead of Treasury Secretary Henry Paulson's trip to China. Mr. McCormick cited 'very significant progress on currency reform,' but added that Mr. Paulson intends to press Beijing for further steps to make the yuan respond to market forces. 'That progress needs to continue . . . It's as important now as ever, perhaps more so.'
Some are skeptical a major devaluation is ahead, though they agree it's not entirely implausible.
The yuan's fall came after the dollar-yuan 'central parity rate,' a reference rate for daily trading determined by the central bank, was set at 6.8505, up sharply from 6.8349 Friday. That's in stark contrast to the 6.8300 level around which the fixing has hovered since early October.
The China Federation of Logistics & Purchasing's November PMI fell to 38.8, the lowest level since it started in 2005. The CLSA China PMI dropped to 40.9 in November, the lowest since the index started in 2004. A PMI below 50.0 indicates a decline in the manufacturing economy. |
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