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China loosens control on currency — a bit

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KAI RYSSDAL: The U.S. trade deficit with China last year hit an all-time high of 1.8 trillion yuan. Almost $232 billion at today’s exchange rate. Imagine, then, that the yuan was worth just half a percent less than it is. And what that might do to the balance of trade.

Next week a Chinese delegation will be in town to talk trade with Treasury Secretary Henry Paulson. Today they effectively took the yuan off the agenda. We asked Marketplace’s Alisa Roth to find out what really means.

ALISA ROTH: Starting Monday, China’s currency will be allowed to rise or fall 0.5 percent a day.It doesn’t sound like much, but the limit used to be 0.3 percent.

The U.S. and the European Union have been pressuring China to float its currency. But Cornell finance professor Warren Bailey says that could have serious consequences.

WARREN BAILEY: Suppose, for example, that they cut it loose and every Chinese citizen who has savings decides that they want to diversify outside China or they want to buy a house in Flushing or Monterey Park. If you see a lot of money being withdrawn from China to invest overseas, that could put pressure on the banking system.

In fact, China may be trying to do the opposite. The central bank announced today that it’s raising interest rates and asking banks to put more money into reserves. Both of which will make it more expensive to borrow money.

University of Chicago professor Dali Yang says China’s trying hard to slow down its hyperactive economy and stock market. But it’s also taking baby steps toward relinquishing control over the yuan. Which could make it a candidate to be a foreign reserve currency, like the dollar or euro.

DALI YANG: If the Chinese yuan is freely convertible, it would immediately become potentially one of the reserve currencies and that will dramatically increase China’s standing in the global economy.

For now though, the yuan’s wider leeway may mean little: the Chinese currency has rarely even explored the limits of the current band.

In New York, I’m Alisa Roth for Marketplace.

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