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Why did China relax its currency peg?

Scott Tong Jun 21, 2010

Why did China relax its currency peg?

Scott Tong Jun 21, 2010


Kai Ryssdal: Beijing picked Saturday to announce a change in policy that Washington — and much of the rest of the financial world, have been waiting for for some time now — that they’re going to take the Chinese currency, the yuan, off its peg to the dollar and let it float. That is, trade freely.

Our China correspondent Scott Tong is on the line with us from Shanghai. Hello, Scott.

Scott Tong: Hello, Kai.

Ryssdal: Why now on this currency decision?

Tong: Well, in China, there’s a little bit of fear of inflation. And China imports a whole lot of things from around the world — soy beans from the United States, and minerals from Australia, oil obviously from the Middle East — and with a weak currency, imports are expensive. So, one reason for this is to get out some of the inflationary pressures in China. Obviously, there is a whole lot of external pressure coming from the U.S. Congress and there’s a G-20 meeting coming up at the end of the week. And China obviously knows that this is coming, more pressure will be around the corner, so most people think it’s a good time to do it.

Ryssdal: Likely effects, then, in the short term — both within China and then in the global economy. What do you think?

Tong: China is telling the world that “OK, we’re gonna boost our currency, we’re going to hurt our exporters a little bit, because you know what? We can take it. The economy is strong enough.” And so China’s saying out loud that their economy is strong enough, is a great signal for people who want to take some more risk. As far as the currency actually appreciating, most of the economists and bankers out this way think it’s just going to creep up. So, even in 12 months from now, we may see a 4 percent appreciation in the Chinese currency against the dollar, so there, don’t hold your breath.

Ryssdal: Let’s say you’re an American manufacturer selling whatever it is, you want to get into the Chinese market for exports. What’s this decision going to mean for you?

Tong: I think it depends if you’re selling into the China market. Because if you’re selling to Chinese consumers, it’s good. What happens with a stronger currency is it makes exports more expensive, but it makes imports less expensive. So the Chinese consumer has a lot more buying power to buy General Motors vehicles, to buy iPhones, whatever. And that’s what the world wants — they want more balancing of the global economy, and China to start buying more things, consuming more and saving less.

Ryssdal: Mmhmm. Big day for you on the broadcast today, Scott. You’re going to be back later on with the beginning of a week-long special series on China’s one-child policy. Tell us what you’ve got for us.

Tong: Well, the one-child policy is in its 30th year. The idea was, China, 30 years ago, was not wealth enough per person. One way to get out that was fewer persons. So, it was mandatory that for the vast majority of people in China, they could only have one child. And so — here’s the tease — part one of the one-child policy series, it’s economic history airs later in the show.

Ryssdal: Scott Tong in Shanghai. Thank you Scott.

Tong: Thank you Kai.

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