No one-off yuan fix: central bank

09:21, June 21, 2010      

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China's central bank said Sunday that there won't be a one-off adjustment of the yuan, one-day after it pledged to enhance the currency's flexibility amid mounting pressure ahead of a G20 summit for the yuan to appreciate.

A question-and-answer document published by the People's Bank of China on its website Sunday said that big exchange rate fluctuation is not in China's interests, and there is no basis for a large-scale appreciation.

The clarifying document followed a statement issued Saturday by the bank, which said continued emphasis would be given to reflecting market supply and demand with reference to a basket of currencies, further proceeding with a reform of the yuan exchange rate regime, which started in July 2005 and resulted in around a 21 percent appreciation of the yuan against the US dollar over three years.

Since mid-2008, the Chinese currency has been held officially at around 6.83 yuan per dollar with a floating band of 0.5 percent, up or down. China has said the policy helped mitigate the impact of the global financial crisis and spur the world's recovery.

"The announcement is significant, indicating that the yuan's de-facto peg against the dollar, which has lasted more than 20 months, has now ended, and signaling a halt to the endless wrestling over the currency's exchange rate," Li Daokui, a Tsinghua University professor and a member of the central bank's monetary policy committee, was quoted by Hong Kong-based Phoenix TV as saying.

US President Barack Obama welcomed the announcement Saturday, but Treasury Secretary Timothy Geithner cautioned that the impact of the announcement would depend on the next steps Beijing takes.

"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a brief statement.

Geithner said the announcement is "an important step," but he added, "the test will be how far and how fast they let the currency appreciate."

US politicians have long argued that the yuan is undervalued, giving China an unfair trade advantage. A group of US lawmakers, led by Senator Charles Schumer, have been pushing for a bill that would allow the government to impose duties on countries with exchange rates that are held artificially low.

In Sunday's statement, the central bank said, "A more flexible exchange rate isn't in response to a bilateral trade imbalance with any one specific country."

The move, it said, is in line with China's long-term fundamental interests, as it will help boost employment, especially in the service sector; curb inflation and asset bubbles; and create a more favorable international development environment for China. The bank added that the overall impact on exports will be a net positive, which has been proved by the reform since 2005.

China's inflation rate jumped to a 19-month high of 3.1 percent in May, and the central bank's dollar buying has left the nation with $2.4 trillion in currency reserves, giving it the world's largest holding, official statistics show.

"This move is a vote of confidence in the global recovery and a reaffirmation of Beijing's longstanding commitment to a flexible currency regime," Stephen Roach, chairman of Morgan Stanley Asia Ltd, told Bloomberg. "This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption."

China's announcement was timed just ahead of the G20 summit next weekend in Toronto, where Chinese President Hu Jintao will meet leaders of the world's major economies, including Obama, who said he was looking forward to discussing the issue at the summit.

Li, the adviser for the central bank, said the decision wasn't directly related to the G20 summit and hadn't been forced on China. The Wall Street Journal however, commented that the move may help avoid its currency policies from being in the spotlight at the meeting.

Rise within 5 percent

Still, the central bank emphasized that the exchange rate will be flexible "in both directions," meaning it may move down as well as up, without giving details about timing.

US Senator Schumer, calling the statement vague, said on Saturday that Beijing needs to spell out just how far it will let the yuan rise.

Reuters reported that all eyes today will be on the daily reference rate set by the Chinese central bank to manage the yuan's value. The WSJ said it is likely to depend on the government's assessment of how well the global economy is performing.

Cao Yuanzheng, chief economist at Bank of China International, told the Global Times that a 3 percent to 5 percent appreciation of the yuan in the future, compatible with the country's labor productivity, is acceptable.

Li said the the yuan's future trend depends on the euro's movement, as well as the trends of other major currencies.

Sunday's statement stressed that the yuan be pegged to a basket of currencies, given its close ties with a number of trade partners, adding that the US dollar should not be the only gauge for judging the currency's rate level, and the current trading bands for the currency will remain.

Trade between China and the European Union in the first five months of the year accounted for 16.3 percent of China's total foreign trade volume, while the trade between the country and the United States, the Association of Southeast Asian Nations, and Japan accounted for 12.9 percent, 10.1 percent and 9.4 percent, respectively, according to the statement.

Although the official policy since 2005 has been that the exchange rate tracks a basket of currencies, the principal point of reference has been the dollar, the Finanial Times reported Sunday.

Source: Global Times


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