China is revaluing its currency upwards against the dollar by just 2.1 per cent. Admittedly the new peg will be applied against a basket of currencies including the euro, rather than just the dollar, but the trading band of just 0.3 per cent around central parity is left unchanged In political terms, China's move may mean something. It sounded dramatic. According to the first reports, China was abandoning its currency peg against the dollar. "To paraphrase Chinese philosophers, the trip of a thousand miles can begin with the first baby step."The revaluation could put downward pressure on the dollar.
This could force the Fed to raise US interest rates more quickly.. It automatically devalues China's estimated $750bn of dollar-denominated assets and could prompt a diversification into other currencies. "This is a good first step, but a baby step," said Senator Charles Schumer, the New York Democrat and co-sponsor of a bill that would have imposed a 27.5 per cent tariff on Chinese imports unless the yuan was revalued. Forty Congressmen urged the government to block it.Those fears have been dispelled in part by a higher revised bid by Chevron which Unocal has accepted. Earlier the US Senate passed an amendment that would in effect require Congressional approval for the acquisition of US assets by a state-owned foreign company.Yesterday, it emerged that Haier, another Chinese company, had withdrawn its offer for Maytag, a US domestic appliance maker - in part, apparently, because of fears of a US political backlash.The currency move may remove some pressure against Beijing.
Widely, if mistakenly, it was portrayed as the loss of future US oil supplies to the Chinese. In a sense,
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the revaluation only underlines China's growing force on the global economic stage.China is at the hub of almost every US economic anxiety, from the "outsourcing" that has led to the loss of manufacturing and service sector jobs, to the pirating of patents and entertainment rights, to a competition for the imported energy resources on which the US depends.Last year, in a deal that symbolised the shifting balance of power, a Chinese company paid $1.75bn for IBM's personal computer business. But that has been eclipsed by the all-cash $18bn bid by the state-owned Chinese oil group Cnooc for the California-based Unocal oil company, topping a bid by Chevron of the US.The threatened take-over came as a bombshell here. The currency move was welcomed by top US policymakers, including Alan Greenspan, the Federal Reserve chairman, and the Treasury Secretary John Snow, who has long urged Beijing to act to correct its huge trade imbalance with the rest of the world. Reform of China's currency arrangements was "important for China and for the international financial system", Mr Snow said, hinting that Washington expected further upward adjustments of the yuan in the future.US officials are under few illusions that the modest realignment will do much to cut the massive US bilateral deficit with China - $200bn (£114bn). But it is unlikely to do much to quell deeper fears here about China's surging economy, and its implications for America. "We had one bit of good news, one bit of bad news and ended the day unchanged," Julian Cane, the director of UK equities at F&C Asset Management, said.
