-->People Flock to Convert
U.S. Currency to Yuan
Amid Fear of Revaluation
By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL
November 18, 2004; Page A16

SHANGHAI -- The long lunch-hour lines at this city's downtown Bank of China are filled with people who not long ago stuffed their accounts with U.S. currency. Now they are dumping dollars.

Yuan Man, ticket No. 252 in line, has set aside more than $50,000 to support his son's dream to study in the U.S., but regrets not holding a stronger euro, or even a firm yen. Ron Chen, an Australian pharmaceutical executive, is paid monthly in dollars and converts each paycheck immediately into yuan. A middle-aged woman and her elderly mother sit nearby awaiting the arrival of an overseas wire transfer. They, too, plan to get rid of their dollars the same day.

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"The dollar doesn't mean anything anymore," says the woman.

From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.

The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.

"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits."It's the best choice," he says.

Standing in line at the Bank of China, the 53-year old Mr. Yuan fears the pain of a revaluation. As owner of a small trading company, he has advised his customers to hold yuan, not dollars. But with a son eager to go to the U.S., he is reluctant to follow his own advice and convert his dollar savings.

"I would like to ask the U.S. government," says Mr. Yuan,"to please keep the dollar stable."

The U.S. government, while rhetorically calling for a strong dollar, has been quietly acceding to the dollar's slide on global currency markets amid steep budget and trade deficits. With China, a major trading partner, keeping its currency at a fixed rate to the dollar, the brunt of the dollar's weakening has been borne by currencies in Europe and Japan. The euro yesterday hit a new high against the dollar. (See related article2.)


Washington is seeking to persuade China to loosen the controls on the yuan so it will strengthen against the dollar, as other major currencies are. The yuan trades at about 8.277 to the dollar and has been tethered to this level since 1994. China's top central bank officials have continued to repeat the watchword"stability" for the exchange rate, suggesting any moves to widen the trading band for the yuan will be slight and gradual.

Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.

China's central bank yesterday also increased the incentive for holding dollars. The People's Bank of China said it would raise the dollar deposit rate for accounts of less than $3 million today. That will bring the one-year U.S. dollar deposit rate to 0.8750% from 0.5625%, according to a statement on the central bank's Web site, narrowing gaps with higher yuan deposit rates. In addition, the central bank has advised commercial banks to set their own interest-rate ceiling for two-year savings deposits denominated in dollars and other foreign currencies.

The moves follow late October's interest-rate rise on yuan deposits, the first such increase in nine years, and reflect a shift to more market-oriented policies to regulate China's capital flows. But Beijing also is relying on other means to soak up dollars and alleviate pressure on its exchange rate. China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange, or SAFE.

Outside the banks, the yuan is in hot demand as well. A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan. In the past, Mr. Lu's customers were those who needed dollars. They were mainly divided into three groups: those who were traveling overseas, those who were paying a child's foreign tuition and those who were smuggling goods into China. With the dollar weakening, demand has reversed and his customer base widened. Beginning around spring, he says, people started arriving with bigger money-changing requests: $10,000; $100,000; even $200,000 to $300,000.

Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan. That hasn't slowed business, however."People keep coming to us," Mr. Lu says."They only want renminbi."

"Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.

At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments."The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting."Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."

Despite the new pressures, China's capital controls give foreign-exchange regulators powerful tools. Companies must register to buy and sell yuan -- and can do so only for trade and services. Individuals may convert as much as $10,000 in a day, but they require special permission for more than that amount.

At the same time, the government is taking small steps to relax China's foreign-exchange system. This week, it announced Chinese emigrants would be allowed to take personal assets out of China, as long as the property has been obtained legally. Yesterday, China's financial regulators said students also could take more foreign currency with them.

One reason China may be reluctant to revalue its currency is that it is waiting to gauge what a proper adjustment might be. While the International Monetary Fund has said more flexibility on the exchange rate would give Beijing a better grip on monetary policy, it doesn't think the yuan is"substantially undervalued," according to a report released this month.

China also could be worried about the impact of a revaluation on its substantial dollar holdings, says Nicholas R. Lardy, a senior fellow at the Institute for International Economics in Washington."Perhaps the [central bank] is focusing not just on the short term problems, but also on the huge hit they will take on the domestic currency value of official reserves," Mr. Lardy says.

Back at the Bank of China branch, the crowd shows no sign of thinning as the afternoon wears on. Every day is the same, says branch assistant manager Liu Hongli. The customers lining up to change dollars are young and old, Chinese as well as foreign."Since a renminbi appreciation is possible," Ms. Liu says,"they feel they can't lose."