Stronger yuan won't cure US trade gap

[HenryTo]

Comments from the Central Bank chief of China justifying the recent 2.1% move and the fact that it won't really affect the U.S. trade deficits.
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Stronger yuan won't cure US trade gap

China's central bank chief says yuan move can't influence a huge US economy.
July 23, 2005: 8:07 AM EDT

BEIJING (Reuters) - This week's revaluation of the yuan will help smooth out global trade imbalances but will not have a big impact on America's trade deficit, China's central bank chief said on Saturday.

Zhou Xiaochuan, the governor of the People's Bank of China, was making his first public remarks since Beijing revalued the yuan, or renminbi, by 2.1 percent on Thursday in a move long anticipated in financial markets.

At the same time, China scrapped the currency's decade-long peg to the dollar and replaced it with a system under which its value will be managed with reference to a basket of currencies.

"After the change in the exchange rate, export companies should probably increase their prices. That can help correct imbalances in global trade in an orderly way," Zhou told a banking conference.

Also on Saturday, a state newspaper said policy makers had debated a larger move of 5 percent, but chose the smaller adjustment partly out of concern that a flood of cheaper imports could squeeze domestic producers and trigger deflation.

A 5 percent revaluation would shave 1.4 percentage points off of China's economic growth, and bring consumer inflation down 1.4 percentage points, the China Business newspaper said, citing a source familiar with the studies.

"The negative effects a 5 percent revaluation would have on the economy might be too large," the newspaper quoted the source as saying.

China's second quarter GDP grew 9.5 percent from a year earlier while annual consumer inflation was 1.6 percent in June.

'Small' impact on US
Zhou, smiling and looking relaxed, said China had made the shift not because of foreign pressure but because it would promote China's long-term growth and stability.

He said China had dropped the dollar as the yuan's sole anchor because the U.S. currency had become too volatile in recent years.

This partly reflected America's economic problems, including large trade and budget deficits, which Washington must tackle, Zhou said.

The central bank chief offered the same analysis as Federal Reserve Chairman Alan Greenspan that the currency shift would not make much difference to the U.S. trade deficit, which hit a record $617.6 billion last year.

The bilateral deficit with China was $162 billion.

"The renminbi revaluation will help the U.S. trade deficit but the effect will be extremely small because the U.S. economy is so huge," Zhou said. China's economy was just on-seventh the size of America's, he noted.

Zhou explained the advantages that greater exchange rate flexibility confers on China's economy but acknowledged that a basket system, entailing daily changes in the yuan's value, introduced a degree of uncertainty for companies.