Central bank: Exchange rate targets basket of currencies

16:16, May 11, 2010      

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The People's Bank of China (PBC), the central bank, said it will set its currency exchange rate policy targeting a basket of world currencies, a clear signal that China will start to move away from the fixed exchange rate pegged with the U.S. dollar.

In its quarterly monetary policy report on Monday, the central bank said the yuan’s rate will be “adjustable in reference of a basket of currencies”, namely the U.S. dollar, the euro, the Japanese yen, the British pound, Korean won and others.

It is the first time in more than a year that the central bank has revised its policy tone. Previously, the bank had reiterated that China would try to make the yuan’s exchange rate “basically stable”. Analysts said the change of tone reflected a trend that Beijing is considering making its currency more flexible on the market, the Beijing-based Economic Information Daily reported Tuesday.

China conducted a major reform of the RMB exchange rate regime in 2005, keeping the RMB targeting a basket of foreign currencies and expanding the exchange rate floating range. However, the reform was suspended due to the global financial crisis, and the RMB was re-pegged to the U.S. dollar.

Although the peg has protected the foreign trade, it has been a tough challenge to domestic monetary policy, the newspaper said.

"This is a clear signal that China will stop the yuan’s peg to the U.S. dollar. In the near future, China will re-start the exchange rate reform based on the market supply and demand and peg the RMB to a basket of currencies," said Zhao Qingming, a senior researcher at China Construction Bank.

Zhao anticipated that the end of the second quarter would be the right time for China to restart the reform.

By People's Daily Online


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