AFTER MONTHS of pressure from the US and the European Union to manage its yuan currency more flexibly, China’s central bank said at the weekend that it would de-peg from the dollar.
The yuan’s value has been pegged to the US dollar for two years, putting a strain on relations with countries who say the currency, also called the renminbi, is undervalued to help make China’s exports cheap.
In a statement released on Saturday, the central bank in China said it would “proceed further with reform of the renminbi exchange rate regime and to enhance the renminbi exchange rate flexibility”.
The central bank said it would focus on “referencing a basket of currencies” that includes the US dollar to determine the exchange rate and on “dynamic adjustment” within the “currently published trading band”.
However, the bank followed up its statement on de-pegging by insisting it would maintain a stable exchange rate and tried to reassure those fearful of a major strengthening by saying it did not anticipate major changes in the value of the yuan.
“There is at present no basis for major fluctuation or change in the renminbi exchange rate,” the bank said on its website, committing to keeping the rate at a “reasonable, balanced level” which would contribute to economic stability and help restructure the Chinese economy.
Analysts said the news was an important signal towards a more flexible exchange rate, but did not necessarily indicate a significant revaluation of the yuan.
“We do not expect the yuan to appreciate significantly against the US dollar in the time ahead, particularly since the euro has weakened substantially and is expected to depreciate further against the dollar and the yuan,” said UBS economist Wang Tao in a research note.
In Washington, President Barack Obama said China’s move would help protect the economic recovery, while the European Commission said it would benefit “both the Chinese economy and the global economy”.
The news comes just before President Hu Jintao headed to Toronto for a meeting of the G20 group, where he had been expecting to come under pressure about his country’s currency policies from both the US and the EU.
South Africa and Brazil have also mentioned their irritation at the yuan’s exchange rate, saying it was undervalued to keep Chinese exports unfairly cheap.
“Certainly, the announcement of the yuan de-peg will put off some international pressure for now, which should help reduce the threat of imminent protectionist legislatures against Chinese products in China’s major trading partners,” said Ms Wang.
“However, it remains to be seen how and how fast the yuan will be allowed to adjust in the coming months, and whether that would be sufficient to stave off further pressures.
“At the same time, the government could face a backlash from domestic interest groups, particularly if both domestic growth and external demand slow later in the year,” she said.
