Higher prices ahead for toys, sneakers imported from China

Friday, July 22, 2005

WASHINGTON -- Attention Kmart and Wal-Mart shoppers: The prices you pay for sneakers, sweat shirts, toys and thousands of other items made in China are likely to be rising soon.

That's thanks to China's announcement on Thursday that it is revaluing its currency. More uncertain is whether the small revaluation will make a noticeable dent in America's huge trade deficit with China.

The Bush administration, facing political pressure because of a record $162 billion deficit with China, hailed the announcement as a victory. Officials from President Bush on down have pressed China to stop linking the value of its currency, the yuan, at a fixed rate to the U.S. dollar.

"This is a very positive development. It clearly puts China on the right path," said Treasury Secretary John Snow.

Federal Reserve chairman Alan Greenspan called the announcement a "good start."

But some economists worry that China may have unleashed economic forces that will eventually worsen inflation in the United States by making imports not just from China but all of Asia more expensive for Americans.

The biggest initial impact on consumers may come in toy prices, since about 75 percent of toys sold in the United States come from China.

There also is concern that interest rates will be rising, too, as the Chinese curb the massive purchases of U.S. Treasury bonds they have been making as part of their campaign to keep the yuan fixed in value against the dollar. And a stronger currency could prompt more takeover bids by China like those launched recently for U.S. oil company Unocal Corp. and appliance maker Maytag Corp.

Still, most analysts argued that the overall impact on the United States and world economies will be extremely positive by trimming America's huge deficits.

In its announcement, China said it would revalue its currency so that it will take 8.11 yuan to purchase one dollar instead of the 8.277 yuan it has taken over the past decade.

China also said it would switch from linking the yuan to the dollar and instead link it to a market-basket of unspecified currencies. Beginning today, the yuan will be allowed to change in value within a 0.3 percent band each day.

An undervalued yuan has made Chinese products cheaper in U.S. markets and American products more expensive in China. American companies contend the yuan is undervalued by as much as 40 percent against the dollar. U.S. automakers estimate a midsize American-made car costs Chinese consumers $2,000 more because of the undervalued currency.

Administration officials say that as American products become cheaper in China, U.S. exports will rise and rising prices for Chinese goods will cause Americans to eventually curb their own purchases. Another significant boost will come when other Asian countries such as Japan, South Korea, Taiwan and Malaysia allow their currencies to rise against the dollar, no longer fearful of losing competitive ground to China.

The dollar's value, which has fallen by about 17 percent against major currencies -- mostly in Europe -- over the past three years, will probably decline by an additional 15 percent over the next three years with the biggest declines being against Asian currencies, analysts predicted.

U.S. Treasury bonds fell sharply in response to China's revaluation on Thursday as investors feared the inflationary effects of the change on the economy and also worried about China's future appetite for U.S. bonds. But many analysts said the markets were overreacting to the prospect of changes that will come only gradually.

Some forecasters predicted that China will only allow its currency to rise in value by about 5 percent this year and another 5 percent in 2006, fearing that anything more dramatic would undercut Chinese exports too much.

"They are going to control this thing with a very tight fist," said Nariman Behravesh, chief economist at Global Insight.

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