BEIJING, June 19, (Agencies): China will gradually make the yuan’s exchange rate more flexible, the central bank said on Saturday a week before a G20 summit, strongly suggesting that it was ready to break the currency’s 23-month-old dollar peg. However, it all but ruled out a one-off revaluation or major appreciation, saying there was “no basis for big fluctuations or changes” in the exchange rate. The dollar peg has come under intense fire from abroad as China’s export juggernaut roared back to life, while much of the rest of the global economy remained sluggish and beset by unemployment in the wake of the financial crisis. Just ahead of a G20 summit in Canada, the announcement seemed to be intended to placate critics of China’s currency regime. It was welcomed by US Treasury Secretary Timothy Geithner who called for “vigorous implementation” of the change.

But China had long said that it would not bow to international pressure over its currency and the central bank went out of its way to dampen expectations for any big yuan rise. “We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar,” Goldman Sachs economists Yu Song and Helen Qiao said. The news could soothe investor fears of a trade row between the United States and China at a delicate time for the world economy and propel world stocks markets higher on Monday.

Intended
It was clear that China intended its announcement — published in English at around the same time as Chinese, a departure from usual practice — to mark the end of the yuan’s de facto peg to the dollar, which it had defended as a “special policy” to protect its economy from the global financial crisis. “The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability,” the Chinese central bank said in a statement on its website. “It is desirable to proceed further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility,” it said. The yuan is also known as the renminbi, or RMB. Dominique Strauss-Kahn, head of the International Monetary Fund, also saluted the announcement, saying it would boost Chinese household incomes and domestic investment, key ingredients for rebalancing the global economy.

In practice, it is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.
Initial movements in the yuan’s exchange rate will probably be small, but cumulatively, it could amount to several percentage points of accumulation over the next few months, several analysts.
Whether the outside world, especially US lawmakers who say an undervalued currency gives China an unfair trade advantage, will agree with that remains to be seen.
International complaints about China’s exchange rate policy had died down in recent months as the European sovereign debt crisis became the dominant concern, but pressure had just begun to flare up again.

A group of US lawmakers, led by Senator Charles Schumer, were pushing for a bill that would allow the United States to use countervailing duties against countries with “fundamentally misaligned” exchange rates.
And the yuan was threatening to be the elephant in the room at a G20 summit in Canada on June 26 and 27.
US President Barack Obama said that it was essential to global economic vitality that countries adopt market-oriented exchange rates, but a series of Chinese officials said the yuan was China’s sovereign concern and should not be discussed in international circles.
China has held the yuan at roughly 6.83 to the dollar since July 2008 in an attempt to insulate the fastest-growing major economy from the global financial turmoil sparked by the US credit crunch.
“The government has made the reform of the exchange rate a priority and has been waiting for the right time to move forward,” said Gao Shanwen, chief economist of Essence Securities.

“Now is the best time to carry out the reform,” he said, pointing to weak market expectations for appreciation, which could help curb the hot money inflows chasing a stronger yuan that have long been dreaded by the Chinese government.
At the end of trading on Friday, investors were betting on the yuan rising 2.2 percent against the dollar over the next 12 months, according to pricing in offshore forwards.
Central bank adviser Li Daokui said the statement marked an end to the fixed exchange rate but added he had no idea when the trading band would be widened, Dow Jones Newswires reported.
The move to increase the flexibility of the exchange rate was China’s own decision and had no direct connection with the G20 summit, said Li, a member of the central bank’s monetary policy committee.
Analysts said the statement suggested the government was moving away from the financial crisis exchange rate policy of effectively freezing the yuan against the dollar, which critics say gives China’s exports an unfair trade advantage.
“I think they are saying this is the basic end of the de facto peg and they will be moving back to the 2005 system and this will mean gradual appreciation over time,” said a Beijing-based analyst who declined to be named.
Morgan Stanley economist Wang Qing said the move to exit the dollar-peg was a “switch to the pre-crisis regime”.

Pegged
Export-driven China has effectively pegged the yuan to around 6.8 to the dollar since July 2008 to support manufacturers battered by the financial crisis and preserve jobs in a sector that employs tens of millions of people.
The currency has been allowed to move within a 0.5-percent range on either side of the peg.
In 2005, China made its currency slightly more flexible and allowed the yuan to appreciate about 20 percent against the dollar until July 2008.
“Today’s decision should pave the way for gradual appreciation of the yuan against the dollar over the rest of the year,” said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.
The bank said that given the gradual recovery in the global economy and greater stability in China, it was “desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.”
The currency issue has been a constant thorn in the side of ties between the US and China.
Facing election-year pressure, US lawmakers from both sides of the political aisle have vowed to launch legislative action within weeks to punish China over its currency policy.
In a letter to US Commerce Secretary Gary Locke this month, they sought a ruling on whether Beijing’s stance provided an “unfair subsidy for Chinese paper products that should be remedied through trade measures.”

“It definitely sounds significant. They’re saying they’re going to press forward,” Stephen Green, an economist at Standard Chartered Bank in Shanghai, said of Saturday’s statement.
“We didn’t ever think they were going to do a big one-off, so it looks like that’s not going to happen,” he said. “We’re going to see more movement around a basically stable exchange rate until the global economy is basically healthier. The proof will be in the pudding on Monday.”
Some US lawmakers argue that Beijing’s exchange rate policy gives Chinese exporters an unfair advantage, costing millions of American jobs.
But Chinese officials have warned that any adjustment to the exchange rate is not other countries’ concern.
The director of the international department of the People’s Bank of China, Zhang Tao, told a news conference Friday that Chinese leaders will not discuss the yuan at the summit.
Saturday’s statement pointed to economic growth both inside and outside China as a reason for the increase in exchange rate flexibility.
“The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the central bank said.
However, it indicated no major policy changes, adding: “The exchange rate floating bands will remain the same as previously announced in the interbank foreign exchange market.”

Welcomed
European leaders welcomed a move by China on Saturday to make its yuan exchange rate more “flexible” saying it would be positive for China and the world economy and help correct global imbalances.
French President Nicolas Sarkozy said the move was “encouraging” and the European Union’s executive said the expected reforms to the exchange rate of the yuan (also known as the renminbi or RMB) should have positive repercussions for the euro zone.
“The European Commission welcomes The People’s Bank of China decision to proceed further with the reform of the RMB exchange rate regime and to resume the RMB exchange rate flexibility,” it said in a statement.
“It considers that such a move will be beneficial for both the Chinese economy and the global economy. The European Commission looks forward to work closely with the Chinese authorities bilaterally and in the G20 to address successfully the current challenges to the global recovery.”
Russian Finance Minister Alexei Kudrin also welcomed the move but said that it would not have much impact on Russia’s economy or trade between the two emerging economies.
“It will not affect us for now, although on the whole it is positive,” Kudrin said. “It will not affect our trade significantly.”
China’s announcement, which comes a week before the G20 group of the world’s leading economies meets in Canada to discuss global imbalances, suggests the country is ready to break the yuan’s 23-month-old informal peg to the dollar.

US President Barack Obama welcomed China’s decision Saturday to make its yuan exchange rate more flexible, saying it would boost global economic recovery from a battering financial crisis.
“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 statement.
“I look forward to discussing these and other issues at the G20 Summit in Toronto next weekend.”
US Treasury Secretary Timothy Geithner welcomed China’s exchange rate flexibility move Saturday, which he said would make a “positive contribution” to global growth once implemented.
“We welcome China’s decision to increase the flexibility of its exchange rate,” Geithner said in a statement.
“Vigorous implementation would make a positive contribution to strong and balanced global growth.”
The United States, through the administrations of President Barack Obama and his predecessor George W. Bush, has long stressed that China keeps its yuan undervalued.

Unfair
US lawmakers insist it is being used by Beijing to gain an unfair trade advantage, making Chinese exports cheaper and ballooning Washington’s trade deficit with Beijing.
Earlier this month, Geithner, under fire for delaying a Treasury report to Congress due in April that could have labelled China a currency manipulator, said Beijing’s refusal to revalue its currency impeded global economic reforms.
But on Saturday, he sounded a note of optimism about China’s move.

“We look forward to continuing our work with China in the G20 and bilaterally to strengthen the recovery,” he said.
IMF chief Dominique Strauss-Kahn said China’s decision Saturday to reform its exchange rate mechanism was a “very welcomed” move that would help Chinese households and consumers.
Amid growing pressure on Beijing to strengthen its currency, China’s central bank earlier said it would further promote reform of its exchange rate mechanism, but maintained there was no basis for “large swings” in the currency.

The announcement came ahead of the meeting of the G20 biggest industrialized and developing economies in Toronto next week, where the controversial exchange rate policy is expected to be on the agenda.
“The People’s Bank of China announcement to increase exchange rate flexibility and return to the managed floating exchange rate regime in place prior to the global financial crisis is a very welcomed development,” Strauss-Kahn said in a statement released by the International Monetary Fund.
“A stronger renminbi is in line with findings of the G20 Mutual Assessment Process, to be presented in Toronto next week, and will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer.”