From Overseas Press

Yuan move alone won't alter US, European growth

Updated: 2010-06-24 11:19
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China's looser grip on its currency won't alter sluggish US or European growth prospects unless Beijing is prepared to assume the mantle of the world's consumer of last resort.

In the short run, a stronger yuan would help neutralize a small but worrisome deflation threat in advanced economies, and boost prospects for U.S. exporters hurt by a weak euro.

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If Saturday's surprise announcement of greater yuan flexibility is to pay long-term dividends, however, China will need to back it up with structural shifts that encourage its consumers to spend more and save less.

Judging from China's words and actions in the past 48 hours, the yuan policy shift appears to be more about Beijing protecting its exports to Europe rather than bowing to US pressure for a stronger currency to reduce trade imbalances.

"By far the most important motivation is China's concerns regarding the euro crisis," said Donald Straszheim, head of China research at Los Angeles-based ISI Group.

The yuan had risen 15 percent against the euro in the last two months as European debt worries sent investors flocking to the perceived safety of the US dollar, threatening China's exports to its largest trading partner.

By linking the yuan to a basket of currencies rather than just the dollar, China can better respond to euro swings. But that also means the dollar-yuan exchange rate is likely to be "more ragged and jagged" in the future, Straszheim said.