Posted on June - 18 - 2010
Yuan to be more flexible
BEIJING – CHINA will keep the yuan’s exchange rate at a basically stable level, the central bank said on Sunday, suggesting that the country’s new currency regime will look a lot like the old one.
China announced on Saturday that it would resume making the yuan more flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism. But in a lengthy statement about how reform would proceed, the central bank explicitly ruled out a one-off revaluation, repeatedly said there was no basis for any big appreciation and added that the currency’s value was not far off its fair level.
Lack of a real rise in the exchange rate would provide ammunition for critics, especially hawks in the US Congress, who say Beijing’s actions will speak louder than its words and that penalties should be imposed if it keeps the yuan artificially cheap. Leaders of the United States, the European Union, Japan and the International Monetary Fund, among others, welcomed its vow to deepen yuan reform as a hopeful contribution to the balancing of the world economy.
All eyes on Monday will be on the daily reference rate set by the Chinese central bank to manage the yuan’s value. Many economists believe that Beijing will nudge the exchange rate higher in increments, not leaps. Global equity markets may rally as the news, coming a week before a Group of 20 meeting in Canada, eases fears of a trade row between the United States and China at a delicate time for the world economy.
The central bank on Sunday promised to implement’dynamic management and adjustment’, which could lead to the yuan falling, not just rising, against the dollar depending on how other currencies perform. But the crux of the exchange rate system would be the same as it had been previously, meaning that the yuan is likely at most to return to the path of gradual gains against the dollar seen for three years until mid-2008.
‘Keeping the yuan basically stable at a reasonable and balanced level is an important part of further promoting reform of yuan exchange rate formation mechanism,’ the People’s Bank of China said, adding that gradual adjustment was needed in order to give firms time to adjust. Chinese economists said the move was justified economically and, above all, had a political aim. — REUTERS
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