China bows to pressure and revalues currency

Analysis: China last night revalued its renminbi, or yuan, currency for the first time in a decade, bowing to international pressure in a move that could give Irish exports to China a lift.

China said it would no longer peg the yuan to the US dollar but to a "basket" of global currencies. The United States had long accused China of hugely undervaluing the currency to help keep economic growth in the world's fastest growing major nation simmering.

The revaluation means that the cost of China's dollar-denominated imports will effectively fall. It was also expected to be the first in a series of steps to strengthen the Chinese currency and to give more play to market forces.

The move changed the dollar peg from 8.28 yuan to 8.11 yuan, which will make Irish and other imports in China cheaper. It also means that Chinese goods exported to Ireland and other countries will become more expensive. More than half of all finished goods in the world are made in China.

There are over 300 Irish companies operating in China and two-way trade between the Republic and China was worth around €4 billion in 2004. Direct trade has risen by over 1,000 per cent in the last six years and China is on course to overtake Japan as the State's main Far East trading partner.

The move amounts to an increase of 2.2 per cent, which will help slow China's economy, currently growing at 9.5 per cent a year.

"I think they've been cautious, and I think admirably so. But I look at it as a first step in a number of further adjustments as they invariably increase their participation in the world trading market. And so I think it is a good start," said US Federal Reserve chairman Alan Greenspan.

US treasury secretary John Snow said the move "put in place a mechanism that provides room for significant movement over time in the currency I think today's developments are extremely positive."

China's leadership had long promised to revalue the currency but kept international financial markets guessing as to when it would do it. The move to revalue the currency will ease tensions between China and western countries. The Bush administration had fought for the greenback peg to be removed and had threatened trade sanctions if Beijing did not play ball.

In a statement published on the official Xinhua news agency, the People's Bank of China said last night that the move was made with "a view to establish and improve the socialist market economic system in China".

The news gave European shares a boost as it raised hopes of increased demand for products made in Europe, although gains on the equity market were reined in by reports of explosions in London.