Sunday, January 20, 2008

Chinese feel pain as Beijing revalues currency

SHANGHAI (AFP) - As China gradually relaxes its controls on its currency, few stand to lose as much as Wu Xiao, a Shanghai black market money changer who may soon be out of a job.

For more than a decade, the Chinese yuan was pegged artificially low against the dollar, resulting in the kind of spread between the official and the market-driven rate that underground traders thrive on. Life was good for Wu.

But since China revalued the yuan in 2005, leading to a cumulative appreciation against the dollar of about 14 percent so far, the spread has narrowed dramatically, and Wu's margins have plunged.

Wu is in a race against time to offload his pile of tightly packed greenbacks before they lose so much of their value that his profit vanishes. Even on the best of days, he makes only two yuan (27 cents) per 100 dollars.

"If the US dollar keeps depreciating then there's nothing we can do. The only way for us to make money is to buy and sell quickly. It's now always safer to have your money in yuan," said Wu.

The change in the exchange rate in January is equivalent to about a 16-percent hike on a yearly basis, and analysts have begun to forecast that yuan could gain as much as nine percent by the end of the year.

China's booming economy has long benefited from a currency that Beijing's trade partners blame for global commercial imbalances, as cheap Chinese exports have soared while more expensive imports have failed to keep pace.

Economic growth in China in 2007 is expected to come in at about 11.5 percent. Much of that expansion is directly related to Chinese exporters which, flush with cash, have ploughed the money back into assets at home.

As inflation has picked up pace -- hitting an alarming 11-year high in November -- regulators are beginning to worry that too much money in the financial system is a main factor behind economic overheating.

"Beijing is becoming ever more concerned about domestic inflation -- and the argument that an undervalued exchange rate is at the root of excess liquidity has won increasing numbers of converts," said Stephen Green, an economist at Standard Chartered in Shanghai.

"The idea has to be that the Chinese yuan appreciation will cool some of the upstream energy and raw material inflation pressure and cool export-related investment," said Green, who estimated the yuan will rise nine percent in 2008.

The good news for the Chinese consumer is that a stronger currency means greater purchasing power to buy imports. For China's globalising firms, it means they can buy overseas assets more cheaply.

But faster currency appreciation spells trouble for China-based exporters, which have to conduct the majority of their trade in dollars.

China Machine Building International Corp in southern Hunan province said the recent adjustments to the yuan had led to a loss of business.

"Some customers refuse to accept our price hikes," said manager Flora Hu.

For Shanghai-based Korean plastics chemical trader Hanren Trading, the change in the value of the yuan have forced it to consider shifting business from exports to imports.

"It cost us much more in production and delivery costs," said manager Yatta Mao, adding that the company faced a debilitating seven percent fall in profit margins.


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