Women’s Wear Daily
04.17.2014
financial
financial

China Currency Move Seen as First Step

Economists said China's decision on Thursday to revalue its currency for the first time in 10 years was a step that might signal more significant changes in...

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WASHINGTON — Economists said China's decision on Thursday to revalue its currency for the first time in 10 years was a step that might signal more significant changes in its economic policy.

After months of political and market pressure, China abandoned its pegging of the yuan to the dollar, strengthening it by 2.1 percent to 8.11 for every dollar. The yuan, also known as the renminbi, had traded at a rate of 8.28-to-1. It will now fluctuate against a so-called basket of currencies.

Critics of the currency policy, including some members of Congress, European officials, and textile and apparel manufacturers, have argued that a lack of currency flexibility had given China an unfair advantage and was a major factor in the loss of U.S. jobs and in a trade deficit with China that reached a record $162 billion last year.

The currency issue has been among several points of friction between the U.S. and China. The Bush administration has pushed China to better enforce intellectual property laws and has imposed quotas on $1.31 billion worth of Chinese imports.

For now, the revaluation isn’t  enough to influence retail prices, change sourcing decisions or relieve pressure on U.S. manufacturers, experts said.

“It’s a small step in a direction that will lead them to greater flexibility, but it isn’t going to change the dynamic in the apparel industry,” said J.P. Morgan Chase economist James Glassman. “It’s not going to change the appeal of China and East Asia as a source of production.”

However, the revaluation might slow the general decline in apparel prices that has characterized the industry for years, said Tom Haugen, president of sourcing giant Li & Fung USA.

“I don’t think we’ll see prices go up because prices are quoted in dollars,” he said. “Their currency would have to be revalued an awful lot for it to have some sort of impact.”

The incremental change, which could ultimately make goods from China more expensive, won’t immediately affect powerhouses like Wal-Mart.

“We don’t expect the change to have any material impact on our business,” said a Wal-Mart spokeswoman, who stressed that the retailer sources goods in more than 70 countries. “Prices in our stores are not going to change anytime soon.”

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The People’s Bank of China, the nation’s central bank, said in a statement that the yuan would be permitted to move up or down 0.3 percent from the close the previous day.

“It’s definitely the beginning of a new policy,” said Ira Kalish, Deloitte Research’s global director of consumer business. “I wouldn’t be surprised to see a 20 or 25 percent revaluation over the next year or so.’’

Nicholas Lardy, a senior fellow at the Institute for International Economics, a Washington-based think tank, said, “The body language of the statement seems to suggest there might be additional moves to come.”

Cass Johnson, president of the National Council of Textile Organizations, said, “It’s not a big enough revaluation. Two percent is meaningless. It’s really not going to slow Chinese exports down at all. We don’t know if this is a step or if they’ve done some smoke-and-mirrors thing.”

The Bush administration reacted cautiously.

“I was struck by and greatly welcome their commitment to use market forces to bring the currency into alignment with underlying demand and supply, and that is good for China and good for the global economy,” Treasury Secretary John Snow said at a news conference. “We will want to follow this closely and we will want to monitor it as they move forward with this new mechanism.”

China’s currency move came as GOP leaders in the House prepare to consider a vote on legislation that would make it possible for U.S. companies to file trade cases against China. The measure is seen as an attempt to garner support for the administration’s Central American Free Trade Agreement.

Sen. Charles Schumer (D., N.Y.), who with Sen. Lindsey Graham (R. S.C.) introduced legislation for a 27.5 percent tariff on all Chinese imports, said, “If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome.”

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