HONG KONG, May 15 China allowed its currency to strengthen today past the psychologically significant level of 8 to the dollar for the first time since 1994, rattling currency and share markets already shaken by the dollar's extended slide and Friday's drop in United States share prices.
The actual rise in the Chinese currency, known as the yuan or renminbi, was tiny: one-tenth of a percent from Friday's level. But the breaching of the 8-yuan threshold unnerved regional investors, who feared that it may prove a prelude to further declines in the dollar.
The dollar dropped to a two-year low against the euro and approached an 8-month-low against the Japanese yen before recovering considerable ground late in the Asian trading day. In New York, the dollar was up 0.6 percent, to 1.2846, against the euro in morning trading; it was its first gain against the euro after losing ground for four straight days.
Ben Simpfendorfer, a currency strategist in the Hong Kong offices of the Royal Bank of Scotland, said that the dollar had briefly dropped so fast earlier in the day that investors became worried that a weak dollar would hurt Asian exports and make Asian shares less attractive, which in turn limited demand for Asian currencies.
"What it has done is begin to undermine risk appetite," for investments in Asia, he said.
Indeed, stock markets plunged across Asia on today, partly on worries that American consumers would buy fewer Asian goods as the price of these goods eventually rises along with Asian currencies. Bourses in emerging markets like India, which fell 4 percent, and Indonesia, down 6 percent, fared worse than the stock market in wealthy Japan, which lost less than 1 percent.
The Shenzhen and Shanghai stock markets actually rose 4 percent, continuing a recent rally. In New York, stocks were mixed in early trading, with the Standard & Poor's 500 stock index and the Dow Jones industrial average up slightly but the Nasdaq composite index down slightly.
The appreciation today of the Chinese currency, known as the yuan or renminbi, marked the first time that it has breached 8 to the dollar since China devalued and unified a series of separate official rates in 1994 into a single exchange rate. That rate was initially set then at 8.7 yuan to the dollar.
The People's Bank of China set a rate of 7.9982 yuan to the dollar at the opening of heavily regulated trading in Shanghai, and the Chinese currency strengthened a little further during the day to close at 7.9976.
Many economists have argued that the biggest beneficiary from an appreciating yuan could be China itself. Wages and real estate prices in China look so cheap in dollar terms at current exchange rates that foreign corporations and individuals alike have been rushing in to buy factories, apartment buildings and other assets, in a frenzy that threatens to kindle inflation in China.
Allowing the yuan to appreciate also makes gasoline, diesel and other commodities priced in dollars less expensive in yuan terms, also helping to control inflation
But exporters in China — a powerful constituency in a country in which exports equal more than a third of economic output — have been deeply worried that a stronger currency could destroy their profit margins. They are especially worried because big companies like Wal-Mart have resisted paying more to suppliers as the yuan rises.
"The impact is very big," said John Huang, the owner of Victory Furniture, an exporter in Shenzhen. "I'm definitely worried about it, our competitiveness is becoming a problem."
From garments to cars, Chinese companies are already responding to the gradual strengthening that has already taken place, and to the likelihood of further appreciation. With encouragement from the government, companies are trying to develop better-designed, higher-quality, more technologically sophisticated products that can command higher prices and profit margins.
"We are prepared for the appreciation — we think it is a big test," said Jiang Lei, the executive vice president of the China Association of Automobile Manufacturers, a government agency that helps set automotive policies. "It is a message for us that we cannot rely on cost alone, we have to improve our technology and our level of management skills."
The Chinese shift toward higher-value goods will put them in more direct competition with products manufactured in North America, Europe and elsewhere in East Asia, however, which could fan further trade frictions.
The Bush Administration has been pressing China for three years to allow the yuan to rise sharply, although the Treasury stopped short last Wednesday of labeling China as a country that manipulates the value of its currency. That prompted many predictions that China would reward the conciliatory gesture by allowing the yuan to move a little higher in interbank trading in Shanghai.
The yuan actually weakened slightly on Thursday and Friday before finally rallying today. China revalued the yuan by 2.1 percent on July 21 and has allowed it to creep up another 1.4 percent since then, including today's increase.
But the yuan has actually been losing ground against the euro and yen, as the dollar has slipped sharply against both of those currencies in the past month. The yuan has fallen 5.3 percent against the euro and 6.1 percent against the yen since April 1.
China released economic statistics today that provided further evidence of a potentially unsustainable economic boom fueled by money pouring into the country. The broad M2 measure of money supply accelerated further in April to show an increase of 18.9 percent from a year earlier, while total loans outstanding were up 14.8 percent in April from a year ago.
Retail sales in China were also 13.6 percent ahead in April from a year ago, a sign that domestic demand in China is strong enough that the country's economy may be able to absorb some slowdown in exports as the yuan rises.
