China May Cut Its Link to DollarI

June 15, 2003
David Smith

CHINA may be ready to break the link between its currency and the dollar, rather than track the falling American currency, analysts believe.

The hugely competitive Chinese economy has been greatly helped by the dollar’s fall, which has pulled its currency, the renminbi yuan, lower against the euro and yen.

The currency link has prevented America getting the full benefits of the dollar’s depreciation, and it has also intensified the pressure on exporters in Britain and Europe.

According to a new analysis by Goldman Sachs, China seems ready to soften the dollar link. It expects the dollar to drop gradually against the yuan, falling from its present 8.28 to 7.86 in the coming months.

Jim O’Neill, head of international economics at Goldman Sachs, said China was coming under mounting pressure to break the currency link. A fall in the dollar against the yuan would also allow it to depreciate against other Asian currencies.

“We see the dollar’s weakness as a catalyst in producing a ‘regime shift’ in the management of the Chinese currency,” he said. The bank expects China’s economy to grow by 7% this year, despite the effects of the Sars virus.

Gerard Lyons, head of global research at Standard Chartered, said a rise in the Chinese currency would be a key factor for the world economy.

“If you talk to G7 countries they will say that’s what is needed,” he said. “But there will be those in China who will continue to argue that market stability and continued strong growth are more important.”

http://www.timesonline.co.uk/newspaper/0,,176-713612,00.html