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Detroit 3 could benefit from China's rising currency

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Detroit 3 could benefit from China's rising currency

U.S. pushed for stronger yuan, which may ease trade tensions

Christine Tierney / The Detroit News

Signs that China's currency is set to rise further bode well for Detroit's automakers, which would benefit from stronger demand for cars in China -- including popular U.S. brands.

And a stronger yuan would allay concerns in Detroit about the prospect of bargain-priced Chinese car imports benefiting from what most U.S. officials consider an artificially weak currency.

The yuan, officially known as the renminbi, rose Monday to its highest level in five years, triggering rallies in global stocks and a short-lived surge on Wall Street, after China's central bank said it would allow its currency to trade in a wider range.

China's trading partners welcomed the initiative because a stronger currency would boost demand for imported goods in China's huge and robust market.

European and Asian stocks rose Monday but the Dow Jones industrial average gave up its gains, closing down 8.23 points to 10,442.41, as investors figured that an appreciation of the yuan would be a long-term process.

The Obama administration said it was encouraged by China's pledge, but White House spokesman Bill Burton said the government was waiting to see whether China would follow through.

For Detroit's automakers, particularly General Motors Co. and Ford Motor Co., which have car-making ventures in China, a rise in the currency would probably boost their sales.

"All of our companies -- GM, Ford and Chrysler -- welcome the Chinese government's announcement to enhance the yuan's exchange rate flexibility," said Stephen Collins, president of the American Automotive Policy Council in Washington, D.C.

But a stronger yuan also has disadvantages for U.S. automakers and suppliers, which are big buyers of Chinese components. Their costs would rise.

Chinese automotive exports to the United States now exceed imports by $5.6 billion.

China, which pegs its currency to the dollar and lets it trade in a very narrow range, has allowed it to appreciate in recent years. But China is under mounting pressure to let the yuan rise further and faster, to more accurately reflect the vigor of its economy.

After China's central bank said Saturday it would allow the yuan to trade in a wider range, it signaled on Monday that it wasn't going to let the currency rise rapidly by leaving the yuan's official reference level unchanged from Friday's rate of 6.8275 to the dollar.

Still, traders betting on a long-term rise in the currency drove it to a five-year high of 6.7976.

A stronger yuan would help China's trading partners recover faster from the global downturn by tapping into the growth of the world's third-largest economy.

It would benefit exporters to China, such as heavy equipment makers and luxury goods firms, by making their products more affordable. But it would raise costs of consumer goods in the United States and other countries importing Chinese goods.

From China's standpoint, a stronger currency would help check inflation -- a risk in an economy growing at an annual rate of 9 percent to 10 percent.

And it might slow down China's exports -- which is why many economists and trade analysts suspect that a rapid yuan appreciation isn't in the cards.

"There is a heavy burden of proof on the optimists," said Alan Tonelson, a research fellow at the Washington-based U.S. Business and Industry Council.

He said the Beijing authorities have made similar statements before, but he believes they are more concerned about unemployment than inflation. "Maintaining employment has been the paramount goal," he said.

But others say one of the benefits of a stronger yuan would be to increase the purchasing power of Chinese consumers. "Recent strikes by Chinese workers suggest that China's government might be afraid that a weak renminbi is creating so much political instability that the biggest political risk it faces is an unhappy Chinese worker," said analyst Peter Cohan of Peter Cohan & Associates in Marlborough, Mass.

From The Detroit News: http://www.detnews.com/article/20100622/AUTO01/6220377/1148/auto01/Detroit-3-could-benefit-from-China-s-rising-currency#ixzz0raKwWaGA

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