China May Float Currency, Snow Says

By Paul Blustein
Washington Post Staff Writer
Wednesday, June 18, 2003; Page E01

As China inches toward freeing its giant economy from state control, the government in Beijing has tightly held the nation's currency, the yuan, at a relatively weak exchange rate, giving a major advantage to Chinese exporters. But now a long-simmering controversy over that policy is heating up.

Treasury Secretary John W. Snow suggested this week that Beijing may allow the yuan to rise, and he made it clear that he wants to see that happen. In doing so, he added his voice to those of American manufacturers, Japanese government officials and others who contend that the exchange rate for the yuan, which has been set at about 8.3 yuan per dollar since 1994, is artificially low.

The lower a country's currency is, the cheaper its products are on global markets -- and China's critics blame the yuan (also known as the renminbi) for fueling an export juggernaut that is driving down prices, squeezing profit margins and threatening jobs worldwide.

Up to now Washington has quietly urged the Chinese to let market forces play a greater role in setting the value of the yuan, which, instead of fluctuating in open trading like the dollar and the euro, is carefully controlled by China's central bank, with restrictions on inflows and outflows of capital. Snow's remarks were the most high-profile exhortation to date by a Bush administration official for a change in policy.

"China has indicated . . . that they intend to create more flexibility on the renminbi, and they're to be encouraged in doing so," Snow told reporters during a trip to Pittsburgh on Monday. "We understand that the Chinese government is interested in moving toward market-based flexible exchange rates, and that's something we support."

Snow's comments, by raising the prospect of heightened pressure on Beijing to let the yuan appreciate, sent prices for the yuan on forward markets hurtling to a record. In these markets, traders can bet on the exchange rate for the yuan one year from now, and the implied rate rose to about 8.097 to the dollar.

The forward rate fell back after wire services quoted Chinese officials as denying any plans to change their stable-yuan policy.

A Treasury spokesman, Tony Fratto, said Snow wasn't predicting anything in particular about the timing of a move to a more flexible rate. Fratto added that he was surprised by the market reaction to Snow's comments, since they only reiterated long-standing U.S. policy favoring flexibility for the yuan, a goal he said the Chinese have endorsed.

An official at the currency policy office of the People's Bank of China in Beijing, Dai Genyou, when asked to comment, would say only that the issue is "a secret about which nothing may be asked."

Speculation about a revaluation or floating of the yuan has intensified recently, thanks in part to a report by Goldman Sachs & Co. predicting that such a move is in the works. And Snow's comments were greeted enthusiastically by Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers.

"A recognition by the U.S. government that the Chinese currency needs to move up is very welcome," Vargo said, noting that the U.S. bilateral trade deficit with China was $103 billion last year -- the biggest with any single country -- and was running at a $120 billion annual rate in the first four months of this year.

China's currency is not the only one the association is complaining about. The organization, part of a group called the Coalition for a Sound Dollar, this week released its first monthly "Asian Currency Manipulation Monitor," accusing Japan, South Korea and Taiwan of using government intervention in exchange markets to keep their currencies artificially low. "We've seen the dollar move [downward] in Canada and Europe, where the market really works," Vargo said, "but with the Asian currencies, most of the governments are intervening."

But not all experts agree that the Chinese are likely to see a substantial rise in the yuan as being in the national interest. By putting a crimp in exports, such a move might risk increasing unemployment, endangering social stability.

Nicholas Lardy, a specialist on the Chinese economy at the Institute for International Economics, said that China's current account surplus -- the broadest measure of the trade balance -- has "deteriorated dramatically this year." The surplus was a healthy 3 percent of gross domestic product last year, but in the first five months of this year it has tipped into a small deficit, Lardy reckoned.

"Maybe for the sake of good relations with the U.S., they might make some modest appreciation," Lardy said. "But my guess is, there won't be any in the short run."

Correspondent Peter S. Goodman contributed to this report from Shanghai.