China yuan devaluation: a delicate dance

BEIJING – China’s announcement late Saturday night that it will end a two-year de facto currency peg to the U.S. dollar should surprise exactly no one, but its implications seem to be confounding even the experts.

In Beijing, economists are divided over how much the value of the currency will grow, or in some cases, if the yuan renminbi (RMB) will rise in value at all.

Around the rest of the country, manufacturers are wringing their hands over whether their costs will rise and by how much, and especially how much they stand to lose on orders — especially the deals already made in U.S. dollars.

In other words, even though it was bound to happen at some point, it seems nobody was quite prepared for the somewhat vague announcement made by the People’s Bank of China.

The bank, it said, “has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.”

The statement marks the end of a 23-month period during which China tied its currency to the U.S. dollar, it said, to help stabilize the economy through the global financial crisis.

“The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China's efforts in promoting global rebalancing,” the bank said.

On Monday, the value of the yuan rose to its highest ever, but that only meant a .4 percent gain. Even U.S. Treasury Secretary Timothy Geithner, who has been at the front of the Obama administration’s push on China to revalue its currency, was guarded in his praise.

“This is an important step, but the test will be how far and how fast they let the currency appreciate,” Geithner said in a statement from Washington. “Vigorous implementation would make a positive contribution to strong and balanced global growth.”

The U.S. argument has been that China’s undervalued currency gives it an unfair competitive advantage in global trade, adding to China’s political problematic trade surplus.

China, of course, disagrees and says its currency policy is its own business. Just last week, Chinese leaders warned against brining up the currency issue at the latest meeting of the G-20 summit, scheduled for June 26-27 in Toronto.

Now, economists in China are downplaying the impact of the central bank’s statement, with some even saying the currency untied from the U.S. dollar might decline in value rather than appreciate.

Yuan Gangming, an economist with the Chinese Academy of Social Sciences, said that while he’s a supporter of the rise of the yuan, he thinks the bank’s statement was intended simply to pacify the United States. Yuan said that China’s economy is on shaky ground and the government won’t make any sudden moves to undermine manufacturing.

The currency “won’t change this year,” Yuan predicted.

Other economists weren’t so skeptical, but the fact remains that uncertainty is the rule right now when it comes to China’s currency.

Several export manufacturers said today that they expect costs to increase significantly as the value of the yuan declines. That’s added to potentially rising wages and other basic costs for factories in China.

“We still don’t know what can be done,” said Xiao Zhang, a trade specialist with a Xiamen-based company that makes toys for export. “Do you have any suggestions?”