Europe welcomes China's decision to free currency

China’s decision to free its currency from a decade-long peg to the US dollar drew praise yesterday from European officials who hoped the change might benefit their economies, which have been battered by cheap Chinese imports.

Officials and analysts said the decision had been expected eventually as China faced political pressure to reform its currency peg.

“We were all waiting for it to come at any time,” said Lee Ferridge, chief currency strategist at Rabobank in London. “It’s the biggest economic event of the year.”

The Chinese government said it would replace the link between the yuan and the dollar and instead allow the exchange rate to be set by a basket of currencies it has yet to name. The government immediately strengthened the state-set exchange rate of the yuan to 8.11 to the US dollar, up from 8.277.

European officials commended China and expressed optimism not only that the change would increase the stability of the global economy but also that it would boost their own economies.

“It’s a positive development for the Chinese economy but also for the euro zone,” French Finance Minister Thierry Breton said.

“The higher foreign exchange rate strengthens the domestic purchasing power and tends to lead to higher imports,” said German Finance Minister Hans Eichel. “The German economy should also profit from this.”

Italy’s Deputy Trade Minister Adolfo Urso concurred, calling China’s decision “an excellent sign that will allow Italian production to breathe again.”

The Italian economy has been hit worse than other euro-zone countries because its production of textiles and other consumer products – which China competes strongly against – account for a bigger share of gross domestic product than in nations such as Germany and France.

France’s Union des Industries Textiles has joined its European counterparts in protesting what they saw as a flood of cheap Chinese textiles imports since the end of a quota system at the beginning of the year.

“This is a very small step in the right direction,” said UIT spokeswoman Emmanuelle Butaud. “But it should only be regarded as a first step.”

Italian business lobby Confindustria cautioned that it would be important to see what currencies are in the basket.

But Rabobank’s Ferridge said he did not expect China to reveal the currencies it is pegging the yuan against – a strategy already taken by Singapore for its currency.

Some economists saw China’s move as a response to growing US pressure - particularly over its hard-line stance toward Taiwan and a bid by Chinese oil producer CNOOC Ltd. for US-based Unocal Corp.

But the change is not expected to have a huge impact on the US’ huge trade deficit with China.

“It’s hard to see how the yuan could appreciate sufficiently against the dollar in the short- to medium-term to have an impact on the Chinese-American trade balance,” said Marc Touati, chief economist at Paris-based Natexis Banques Populaires.

The effects on Europe were also likely to be small, said Holger Schmieding, head of European economics for Bank of America in London.

::The dollar recovered The dollar recovered in Asian trading this morning, reducing some of its dramatic plunge that followed China’s move yesterday to loosen its currency’s peg to the dollar, a decision that sent the yen and other Asian currencies soaring.

Japanese government and business officials welcomed the move as heralding China’s big symbolic step as a member of the international community and free market.

They played down worries about possible damage to the Japanese economy, although a strong yen erodes exporters’ overseas earnings and makes the price of Japanese products more expensive abroad.

The dollar was trading at 110.95 yen in Tokyo late morning, down 1.43 yen from late Thursday but above the 110.28 yen in New York later that day. The dollar slid by more than 2 yen overnight in New York.

The euro rose to 1.2168 dollars in Asian morning trading from 1.2166 dollars the previous day. Overnight in New York, the euro was at 1.2171 dollars after spiking to 1.2270 dollars after China’s announcement. in Asian trading this morning, reducing some of its dramatic plunge that followed China’s move yesterday to loosen its currency’s peg to the dollar, a decision that sent the yen and other Asian currencies soaring.

Japanese government and business officials welcomed the move as heralding China’s big symbolic step as a member of the international community and free market.

They played down worries about possible damage to the Japanese economy, although a strong yen erodes exporters’ overseas earnings and makes the price of Japanese products more expensive abroad.

The dollar was trading at 110.95 yen in Tokyo late morning, down 1.43 yen from late Thursday but above the 110.28 yen in New York later that day. The dollar slid by more than 2 yen overnight in New York.

The euro rose to 1.2168 dollars in Asian morning trading from 1.2166 dollars the previous day. Overnight in New York, the euro was at 1.2171 dollars after spiking to 1.2270 dollars after China’s announcement.