China Lets Currency Rise Past Key Level

By KEITH BRADSHER

Published: May 16, 2006

HONG KONG, May 15 — China allowed its currency to strengthen past the symbolic level of eight to the dollar Monday, rattling Asian markets already shaken by the dollar's extended slide and Friday's drop in share prices in the United States.

bank teller counted stacks of 100-yuan notes Monday, around the time the central bank set the yuan trading rate at 7.9982 to the dollar.

Michael Falco for the New York Times

A vacuum tubes for use in guitar amplifiers.

Luke Tchalenko for The New York Times

An employee at the American-owned Expo-Pul factory in Saratov, Russia, works on a vacuum tube.

The actual rise in the Chinese currency was tiny: one-tenth of a percent from Friday's level. But the breaching of that threshold unnerved regional investors, who feared that it could open a path for broader declines in the dollar.

The Bush administration has been pressing China for three years to allow its currency to rise sharply, although the Treasury stopped short last Wednesday of labeling China a country that manipulates the value of the currency, the yuan.

That prompted many predictions that China would reward the conciliatory gesture by allowing the yuan to move a little higher in interbank trading in Shanghai. On Thursday and Friday, though, the yuan weakened slightly before rallying on Monday.

The dollar — which has fallen markedly against other major currencies in recent weeks — briefly slipped to a two-year low against the euro and approached an eight-month low against the Japanese yen before recovering considerable ground late in the trading day here and in New York.

Ben Simpfendorfer, a currency strategist in Hong Kong with the Royal Bank of Scotland, said the dollar had briefly dropped so fast earlier in the day that investors became worried that a weak dollar would hurt Asian exports and make Asian shares less attractive, which in turn curbed demand for Asian currencies.

"What it has done is begin to undermine risk appetite" for investments in Asia, he said.

Indeed, stock markets plunged across much of Asia on Monday, partly on worries that American consumers would buy fewer Asian goods if a continued weaker dollar made those goods more expensive.

Bourses in emerging markets like India, which fell 3.8 percent, and Indonesia, down more than 6 percent, fared worse than the stock market in wealthy Japan, where the benchmark rate declined less than 1 percent.

The Shenzhen and Shanghai stock markets, though, rose about 4 percent, continuing a recent rally.

The appreciation on Monday of the Chinese currency was the first instance of its breaching eight to the dollar since China devalued and unified a series of separate official rates in 1994 into a single exchange rate.

At that time, the exchange rate was initially set at 8.7 yuan to the dollar.

On Monday, the Chinese central bank set a rate of 7.9982 yuan to the dollar at the opening of heavily regulated trading in Shanghai, and the currency strengthened a little further during the day to settle at 7.9976. In New York, it settled at 8.0055 to the dollar.

Many economists have argued that the biggest beneficiary from an appreciating yuan could be China itself.

Wages and real estate prices look so cheap in dollar terms at current exchange rates that foreign corporations and individual investors have been rushing in to buy factories, apartment buildings and other assets — a frenzy that threatens to kindle inflation in China.

Allowing the yuan to appreciate also makes gasoline, diesel fuel and other commodities priced in dollars less expensive in yuan, which helps to control inflation as well.

But Chinese exporters, a powerful constituency in a country where exports equal more than a third of economic output, have been deeply worried that a stronger currency could destroy their profit margins. They are especially worried because big companies like Wal-Mart have resisted paying more to suppliers as the yuan rises.

"The impact is very big," said John Huang, the owner of Victory Furniture, an exporter in Shenzhen. "I'm definitely worried about it; our competitiveness is becoming a problem."

In products as varied as garments and cars, Chinese companies are already responding to the gradual strengthening of the currency that has taken place, and to the likelihood of further appreciation.

With encouragement from the government, companies are trying to develop better-designed, higher-quality, more technologically advanced products that can command higher prices and profit margins.

"We are prepared for the appreciation — we think it is a big test," said Jiang Lei, executive vice president of the China Association of Automobile Manufacturers, a government agency that helps set automotive policies. "It is a message for us that we cannot rely on cost alone; we have to improve our technology and our level of management skills."

But the Chinese shift toward higher-value goods will put them in more direct competition with products manufactured in North America, Europe and elsewhere in East Asia, and this could fan further trade frictions.

China revalued the yuan by 2.1 percent on July 21 and has allowed it to creep up by 1.4 percent more since then, including Monday's increase.

Still, the yuan has been losing ground against the euro and the yen, as the dollar slipped sharply against those currencies in the last month or so. Since April 1, the yuan has fallen 5.3 percent against the euro and 6.1 percent against the yen.

China released economic statistics on Monday that provided further evidence of a potentially unsustainable economic boom fueled by money pouring into the country. A broad measure of the money supply, known as the M2, accelerated in April to an increase of 18.9 percent from a year earlier, while total loans outstanding were up 14.8 percent.

Retail sales were also 13.6 percent ahead in April from a year earlier, a sign that domestic demand in China was strong enough that the country's economy might be able to absorb some slowdown in exports as the yuan rises.