BEIJING — Facing intense international pressure, China took a crucial first step Thursday toward overhauling its currency system, a move that could help ease U.S.-China tensions but eventually raise costs for everything from toys and fruit juice to homes.
Beijing lifted the value of the yuan by 2.1% against the U.S. dollar, much less than what many American lawmakers had hoped for and too little to alter sales of cheap Chinese goods to the U.S.
But in abandoning a decade-old practice of pegging the yuan to the dollar, China opened the door to further appreciation of its currency, which carries significant implications for itself, the U.S. and the global economy.
A stronger yuan could raise prices of Chinese-made products in the U.S. at a time when the American economy increasingly depends on cheap goods from the Asian nation, analysts said. It also could reduce China's desire to buy U.S. Treasury securities and thus push up mortgage rates, highlighting China's influence on the sizzling U.S. housing market, they said. News of China's move helped send U.S. interest rates higher Thursday.
On the other hand, a steady rise in the yuan would help American businesses selling to China such goods as cotton, copper and soybeans, as it would make those products more affordable to the Chinese. U.S. companies have dramatically boosted their sales in China in recent years, hoping to capitalize on its booming economy and fast-growing consumer society.
Despite the small first step, China's currency move was welcomed by the Bush administration, Federal Reserve Chairman Alan Greenspan and members of Congress who had threatened sanctions if China failed to revalue the yuan. Critics in Congress had contended that the yuan was undervalued by as much as 40%, giving China an unfair trade advantage and contributing to the bulging U.S. trade deficit.
"Today's developments are extremely positive," said U.S. Treasury Secretary John W. Snow, who during a recent visit to Beijing urged Chinese officials to revalue the currency.
Also applauding the action were finance ministers and central bankers from several European and Asian countries, whose fortunes have become increasingly linked to China's economy.
The action also could benefit China by enhancing the Beijing government's ability to control its economy, which has become the most important engine of global economic growth along with the United States.
