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July 21, 2005
China's Clever Money Move

China today dealt a blow to the protectionist sentiments building in the the U.S. Congress and thus did a great favor to the global economy, especially American technology companies. China slightly changed it currency's (the yuan) value against the U.S. dollar, from 8.3/US$ to 8.1/US$. The move is immaterial economically but allows China to claim it has "revalued." The large revaluation so many U.S. politicians were seeking, but did not get, would have been bad for both China and the U.S.

China has fixed the yuan to the dollar since 1994, a brilliant move by then-economic minister Zhu Rongji. The peg created a single economic fabric stretching across the Pacific, kept China from catching the Asian flu of 1997-98, helped mitigate some of the Federal Reserve's errors, and led to the deep integration of the American and Chinese economies that we both now enjoy. It was exactly the opposite of currency "manipulation" as so many have charged.

China today also said it would drop the dollar peg in favor of a new link to a basket of international currencies. It thus retains the "fixed" nature of its international monetary relationships, a key pillar of China's economic success over the last dozen years, with the added advantage of smoothing away some of the dollar's volatility.

The largest effect is to defuse the Schumer-Graham tariff bomb aimed straight at the heart of the U.S. economy.

-Bret Swanson

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