Beijing's Bombshell: Brace For A Floating Currency

It was quite a shock. Chinese Prime Minister Zhu Rongji was meeting with a delegation of Hong Kong executives visiting Beijing in late June. Zhu told the 40 businessmen, including mogul Li Ka-shing, that the International Monetary Fund had suggested that China float its currency, the yuan. Zhu said he was considering it, perhaps before the end of this year. Zhu's audience expressed concern about the disruptive impact on China's economy as well as on Hong Kong's. But they came away from the meeting convinced that Zhu was serious about the idea--and that it's only a matter of time. "Floating the yuan is in the cards," says one of the execs present at the meeting.

How China manages such a momentous transition will have a tremendous impact on the reforms it needs to pull off as it emerges into the global economy and joins the World Trade Organization. Certainly the devil is in the details. Zhu has quietly been seeking advice on floating the yuan from Hong Kong's financial community. Those who have been advising him say the Premier is considering enlarging the trading band by 10% above or below its current fixed rate of 8.3 to the U.S. dollar. With the Chinese economy now stable, Zhu is betting that he can pull off a managed float without spooking the markets, sparking capital flight, and causing financial turmoil.