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Revaluation of the Yuan

Posted April. 25, 2005 23:31,   


The U.S. pressure on China to revaluate the yuan is growing stronger. China seems to be earnestly considering this alternative.

On April 23, the Chinese government implied that in relation to its exchange rate policy, it may change to a more flexible policy, resulting in rumors stirring up that a revaluation is imminent. However, as the yuan revaluation became accepted as a fact in the international financial market, the Chinese government hurriedly started to put out the fire by officially denying this on April 24 and 25.

From the middle of April, high-ranking officials of the U.S. government have been firmly expressing themselves day after day. U.S. President George W. Bush has come forth twice, on April 14 and 19, and said, “China must change its exchange rate system into a floating exchange rate system (from the peg system, a kind of fixed exchange rate system).” In a similar tone, U.S. Treasury Secretary John Snow and U.S. Federal Reserve Board Chairman Alan Greenspan also pressed China.

The cause of this pressure is the rapid increase in the trade deficit of the U.S. The U.S. trade deficit with China last year recorded the largest in history, $162 billion, and is expected to grow larger this year.

Accordingly, China’s agony is evident. This is also due to the fact that, in addition to external pressure, there are also quite a few internal factors. Despite the retrenchment policy, China’s economy has recorded 9.5 percent growth this first quarter, exceeding expectations considerably. Furthermore, the foreign exchange holding increased by $50 billion in the first quarter and, as a result, the pressure of inflation has also increased.

Consequently, on April 23, the president of the People’s Bank of China, Zhou Xiaochuan, commented that the bank will accelerate to a “flexible yuan system.” Due to his comment, the rumor of an imminent revaluation quickly expanded.

As the situation took a bad turn, Chinese Vice Director of the State Administration of Foreign Exchange Wei Benhua publicly denied the “revaluation rumor” on April 25.

The Chinese government is anxious that a simultaneous retrenchment policy and revaluation of yuan might trigger a hard landing.

Heon-Jin Lee mungchii@donga.com