updated 6/19/2005 6:45:37 PM ET 2005-06-19T22:45:37

Higher prices for Chinese-made T-shirts and TV sets but bigger sales for U.S. 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, U.S. manufacturers have been lobbying Washington to impose trade sanctions if China doesn't loosen controls on its currency _ 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 U.S. furniture makers to Portuguese T-shirt producers.

But American and European consumers would likely 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.

Differing impacts
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 in yuan terms 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.

"For companies like ours, the situation is already tough enough," said Qian Zhiqiang, a Shanghai textile trader. "But it's a political decision, not just an economic one. Those are the rules of the game."

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.

But more expensive Chinese products could prompt U.S. retail chain 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.

Furniture buyers might shift to Vietnam or Brazil, says Erik Autor, vice president of the National Retail Federation, a U.S. trade association.

Economists disagree over how significant a change in the government-set exchange rate of 8.28 yuan per dollar would be.

They don't expect an immediate end to exchange rate controls, which could potentially send the yuan soaring. Chinese banks would suffer a massive outflow of cash as Chinese depositors moved money abroad, seeking better returns.

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 5-10 percent.

Future plans?
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.

"But it's not a big problem," says Wei Yen, a Hong Kong-based banking analyst for the financial rating firm Moody's. "The government realizes that this will have an impact on banks' balance sheets and it would relax the regulations."

China's leaders have pledged to eventually liberalize the foreign exchange regime, but they say doing so immediately could lead to financial turmoil and destabilize the economy.

Official comments suggest there is a debate underway between top Chinese leaders, who view even a 10 percent shift as too extreme, and the central bank, which wants a bigger shift. Bank officials worry that a small move would just fuel speculation over future revaluations.

"They would argue that a small change is worse than no change at all," says Nicholas Lardy, an expert on the Chinese economy at the International Institute of Economics, a Washington think tank.

In the long run, however, China must revalue for its own sake, he said.

As China piles up massive trade surpluses, which usually drive up a country's exchange rate, the central bank has been buying up billions of dollars to reduce pressure for the yuan to rise and to avert inflation.

"They have done a good job of suspending the laws of gravity, but eventually it will catch up with them," Lardy said.

Many experts believe a stronger yuan will have little effect on the U.S. trade deficit with China, which hit a record $162 billion last year — the largest ever for a single country — much less return manufacturing jobs to North America.

"My feeling is this is going to be a major nonevent, when it happens, in terms of major impact on the trade balance," said Stephen D. Cohen, an expert on international economics at American University in Washington. "There will be some increase in U.S. exports, say, to Europe, but we will still have a huge imbalance with China."

There are few authoritative calculations of the potential impact of a revaluation in China.

But an estimate by Zhai Shihong, a senior official at the National Bureau of Statistics, says a 5 percent rise in the yuan's value would cut export growth to below 10 percent, from 35 percent last year.

The biggest winner would be China's economic efficiency, according to Lardy.

He said the current cheap yuan encourages Chinese companies to invest too much in export manufacturing, hurting industries that serve the domestic market.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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