China's currency policy at center stage

SHANGHAI -- Higher prices for Chinese-made T-shirts and TV sets, but bigger sales for US and European factories. Cheaper imports for Chinese consumers, but slimmer profits for foreign companies that have shifted operations to China.

If Beijing yields to pressure from the United States and other trading partners and lets its currency rise, the decision could have unpredictable payoffs and costs around the world.

Claiming that China's policy of pegging the yuan to the dollar has made Chinese-made goods undervalued by as much as 40 percent, US manufacturers have been lobbying Washington to impose trade sanctions if China doesn't loosen currency controls -- a move that would most likely cause the yuan to appreciate, economists say.

China is the world's source for low-cost, low-tech goods such as textiles, toys, appliances, and sporting goods. A rise in their prices could be a relief for competitors, from US furniture makers to Portuguese T-shirt producers. But Americans and Europeans would probably pay more for everything from shoes to DVDs. And retailers that rely on Chinese imports would be hit by higher prices.

''If you buy anything made in China, you'll lose. Everything that's in Wal-Mart," says Linda Y.C. Lim, a business professor at the University of Michigan.

For Chinese companies, a rise in the yuan would have differing impacts, depending on the industry. Steelmakers and oil companies would probably benefit by paying less for the heavy machinery and materials they import. But many others would suffer. One recent report in the Chinese state media said that even a 5 percent rise in the yuan would cost makers of toys, clothes, shoes, luggage, and furniture the equivalent of billions of dollars in lost export earnings.

A stronger yuan could also hurt other Asian nations by lifting the value of the Japanese yen, Taiwanese dollar, South Korean won, and Thailand baht due to the region's close trade ties. And more expensive Chinese products could prompt Wal-Mart Stores Inc. and other major buyers of Chinese exports to import their goods from other low-cost markets such as Indonesia and Bangladesh.

Some currency traders predict that Beijing will widen the band within which the yuan trades, expanding it from the current 0.3 percent above and below the dollar peg to 5 to 10 percent.

Chinese officials have reportedly been discussing a plan to tie the yuan's exchange rate to a basket of several currencies, including the dollar, euro, and yen. Even a small revaluation would shrink the value of Chinese banks' foreign assets as the dollar declined against the yuan. That could undermine efforts to build up their capital bases and compete with foreign rivals.

China's leaders have pledged to eventually liberalize the foreign exchange regime, but they say doing so immediately could lead to financial turmoil. Official comments suggest there is a debate underway between Chinese leaders, who view even a 10 percent shift as extreme, and the central bank, which wants a bigger shift.