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Chinese currency may rise against US dollar. Good for both nations?

Beijing is expected to let the Chinese currency rise about 3 percent against the US dollar. That could benefit Chinese consumers and help reduce America's large trade deficits.

By Staff writer / April 9, 2010

An employee counts Yuan banknotes at a Bank Of China branch in Hefei, Anhui province Tuesday. On Tuesday, Beijing denied that it manipulates Chinese currency and rejected the argument that a stronger exchange rate against the US dollar would erase the US trade deficit with China.

Stringer/REUTERS

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China is expected to let its yuan currency rise modestly against the US dollar – a move that would have important economic and political implications for both nations.

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The policy shift by Beijing has not yet been formally announced, but several news organizations reported it Friday. The New York Times cited "people with knowledge of the emerging consensus in Beijing," while The Washington Post said, "Beijing may be ready to let the yuan appreciate as much as 3 percent."

A 3 percent change is relatively small, but the move, many economists believe, would benefit both nations. It would make US-made goods a bit more affordable to Chinese consumers, which in turn could help reduce America's large trade deficits.

Perhaps the most important outcome of a Chinese currency adjustment would be political. The move could ease pressure on China from lawmakers in the US Congress, many of whom say China should be named as a currency manipulator in a scheduled Treasury Department report.

US presidents including Barack Obama have leaned on China, but they've been wary of being too confrontational in an important economic relationship. They haven't used the "manipulator" label.

Earlier this month, the Treasury Department delayed its semiannual currency report to Congress, originally due on April 15, for up to three months.

For China, a stronger currency could encourage a transition from growth driven heavily by exports to growth fueled increasingly by domestic consumer activity.

A stronger yuan, also known as the renminbi, would increase Chinese purchasing power when it comes to goods from outside the country. Many Chinese policymakers see such a shift as desirable, although others in China worry that stronger currency will make it harder for the nation to retain low-wage factory jobs.

According to Friday news reports, China may allow both a rise in the yuan and greater flexibility for the exchange rate from day to day. An annual rise of about 3 to 5 percent would essentially return to a policy China backed before the financial crisis. The yuan appreciated about 20 percent from the middle of the decade until 2008.

While some see that as a healthy adjustment, critics of China's exchange-rate policies worry it won't be large enough to dent the trade imbalance between the two nations.

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