China's move to revalue its currency and abandon the dollar peg was broadly welcomed yesterday by both the financial markets and trade barons as a move to more openness by the world's fastest growing major economy.over next 12 months
At the same time, some commentators were reserving judgment on the long term effects of the move until they saw how the revaluation shaped up.
Whatever the effect on the financial markets, it will make Irish exports to China cheaper, and some of the growing number of Chinese tourists travelling to Ireland under new visa rules might find their yuan goes further in the Aran sweater shops.
Under the foreign exchange system announced on Thursday, the value of the Chinese currency, called the yuan or the renminbi, will be in reference to a basket of currencies, most likely the dollar, the euro, the yen and other major currencies, rather than just the greenback.
It effectively means a move to a managed float and Beijing let the yuan appreciate by slightly more than 2 per cent against the dollar.
The move was big news in China, leading the bulletins on most media. The main focus domestically was on how the revaluation was the latest example of the Beijing government's steady-hand economic policy - economic decisions in China are driven by a need for stability and all policy has to reflect that.
The yuan began trading in Shanghai at 8.11 per dollar, the new rate announced on Thursday evening, and then hugged a tight range under the watchful gaze of the central bank before ending the day at 8.1111.
Financial markets outside China betting on the future value of the yuan centred on a rate of 7.7 per dollar in one year's time - a rise of over 5 per cent from Thursday's level.
That market pricing tallied broadly with a Reuters poll on Friday of 33 economists who, on average, predict a yuan exchange rate of 7.78 per dollar by the middle of next year.
But the official China Daily newspaper tried to calm talk that the currency would lurch higher. "Expectation for a bigger appreciation of the yuan's value was, and will be, unrealistic," the paper said in an editorial.
"Moving to a more flexible exchange rate regime has always been a stated policy goal of the Chinese government. In the long term, a floating rate gives China the ability to run a fully independent monetary policy, as well as avoid the pitfalls of the Asian crisis economies," UBS said in a research note.
The bank's research team believes the move marks the beginning of a long, gradual change to a floating yuan exchange rate.
There was broad agreement that the move would help ease tensions between China and the US and Europe over cheap Chinese goods flooding into rich Western markets. A big question is whether this will affect Chinese competitiveness in Asia, but most dismiss this fear.
However, even if Chinese wages double, firms are unlikely to move their manufacturing bases elsewhere. UBS said it did not matter if manufacturing wages were $100 per month or $102 per month. Many still believe that the yuan is still undervalued by between 10 and 40 per cent. "The regime clearly allows for further appreciation in the yuan under certain circumstances and we expect the yuan to strengthen further against the dollar over the next 12 months," investment bank Goldman Sachs said.
