BEIJING - In Chinese street slang, they are known as the "yellow bulls" -- the underground traders who lurk outside the banks in aggressive pursuit of currency deals. But despite their business zeal, there is one commodity they are unwilling to buy on the street these days: U.S. dollars.

"Everyone is converting their dollars to Chinese yuan," one black-market trader confided as he stood outside a bank in Beijing yesterday.

"Our business is getting more and more difficult," he said. "It's hard to find anyone buying U.S. dollars any more. The value of the yuan is definitely going to increase."

These are anxious days for China's legions of canny traders and savers. Not long ago, they had faith in the American dollar as the safest of safe havens -- a guaranteed stable investment. For years, China had survived financial crises by pegging its currency to the U.S. dollar.

But the prolonged slump in the dollar, along with hints of an approaching revaluation of the yuan, has created a new phenomenon here: the shunning of the greenback.

"Nobody with a U.S.-dollar account can sit quietly at home any longer," said one man in a queue at a Bank of China branch yesterday. "The black market is a sign of the market trends. The government might say that it won't change the official exchange rate today, but tomorrow it could announce a change."

For the past decade, China has held the yuan to a fixed value of about 8.3 to the U.S. dollar. In the past, the black-market traders were often willing to pay up to nine yuan for a dollar. But today the unofficial rate on the street is only 8.22 yuan to the dollar -- if you can find anyone willing to buy dollars.

Many Chinese investors are nervously wondering whether they should get rid of their dollars. "I'm worrying about it," said Li Dan, a 28-year-old information technology manager in Beijing.

"I've got $60,000 [U.S.] accumulated from shares in my company. What should I do? Who can tell if the exchange rate will decline? If I don't convert my money to yuan, I could lose thousands of dollars. That's a lot of money."

Many have already dumped their dollars. By the end of October, the switch from dollars to yuan had contributed to a 3.8-per-cent drop in foreign-currency savings by Chinese households, compared with a year earlier. This amounted to a decline of $1.7-billion in household foreign-exchange savings this year alone. At the Shanghai branch of the Bank of China, meanwhile, the conversion of dollar accounts to yuan accounts increased by 17 per cent in September and 34 per cent last month.

The dollar has lost the aura of stability that it once enjoyed here. And with the Chinese economy booming, a growing number of Chinese investors are regarding the yuan as the new hard currency. On the pages of a Hong Kong newspaper this month, the trend was illustrated by a picture of a man setting fire to an American dollar bill on Tiananmen Square, with the caption: "Money to burn."

Many Chinese are betting that the dollar will continue to decline and the yuan will be revalued. In the non-deliverable forward market in Hong Kong, the current level of forward contracts suggests that the yuan would rise to a level of 7.887 to the dollar within 12 months if it were freely traded.

The Chinese media and bank officials have sent out a growing number of signals that the yuan could be revalued in the next few months. The central bank has talked of possible "flexibility" in the value of the yuan. Some reports predict a widening of the trading band in the first quarter of next year.

"The decline of the U.S. dollar... may be the final factor convincing Beijing to revalue the currency," concluded a report this month by the Eurasia Group, a New York-based firm of political analysts.

"A modest currency revaluation increasingly appears to be Beijing's next step in cooling its economy."

The deputy governor of China's central bank, Li Ruogu, confirmed this week that China is gradually moving toward greater flexibility in its dollar exchange rate, although he emphasized that it would not happen as long as Western leaders continue to apply heavy pressure on China to revalue its currency.

"Everybody is saying that the value of the yuan will increase," a Beijing bank customer said yesterday.

"Even though the central bank says it will happen, I think it is just a matter of sooner or later."

Rising currency giant

With the Chinese economy booming and the U.S. dollar wavering, Chinese investors are dumping their greenbacks, convinced the yuan is becoming the new hard currency.

The people's currency

The name

Chinese money is called Renminbi, which means People's Currency.

The issuer

The People's Bank of China. The popular unit is the yuan.

Bank of China Governor

Dai Xianglong

Exchange rate

The yuan's exchange rate has been pegged to the greenback for a decade, and one U.S. dollar equals about 8.3 yuan.

Denominations

0.10, 0.20, 0.50, 1, 2, 5, 10, 50, and 100 Yuan. Smaller values are issued as coins, with 1 yuan = 10 jiao = 100 fen.

History

1023

The Chinese are the first to use paper currency, issued during the S'ung dynasty.

1948

People's Bank of China was established Dec. 1, and was the first sector to be socialized by Chairman Mao's new republic.

1966-1876

Bank stripped of many of its functions during the Cultural Revolution, but it regained responsibility for issuing and controlling currency.

1983

Bank assumes responsibilities of a central bank, a status not legally confirmed until 1995. It is modelled after U.S. Federal Reserve system, with monetary policy managed by various local offices.

1998-99

In the wake of the Asian currency crisis, Bank is under pressure to devalue Renminbi. Replaces quota management of credit with assets-to-liabilities ratio management.

Dumping the dollar

The Chinese are living up at banks to sell U.S. dollars for yuan. China's foreign reserves are climbing as the central bank buys those dollars to keep the exchange rate steady.

SOURCE: THE WALL STREET JOURNAL

© Copyright 2004 Bell Globemedia Publishing Inc. All Rights Reserved.

http://www.theglobeandmail.com/servlet/story/RT