China Signals End to Yuan’s Peg to Dollar Before G-20 Summit
June 20 (Bloomberg) -- China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.
The decision was made after the world’s third-largest economy improved, the central bank said in a statement on its website yesterday, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged.
“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”
The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner’s policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.
‘Very Cautious’
A question-and-answer document published by the central bank on its website today said Chinese companies will have time to adapt to yuan changes and reaffirmed a government policy of “gradualism” in exchange-rate reform. Increased yuan flexibility and “two-way movements” by the currency will aid management of the economy, it said.
Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said today’s statement acknowledges that the yuan will appreciate and suggests daily volatility may increase, while highlighting that the government remains “very cautious” and will control the pace of gains.
“This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill told Bloomberg Television in St. Petersburg, Russia.
“It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”
Geithner’s Praise
Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.
China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.
“It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Prasad, a former head of the China division at the International Monetary Fund.
Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.
The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi.
‘Vote of Confidence’
“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., said in an e-mail. “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.”
Chinese companies focused on the domestic market, including Beijing-based computer maker Lenovo Group Ltd., said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy,” Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said then.
Freedom to Move
A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said last week. The central bank agreed today, saying benefits could include curbing price gains, asset bubbles and dependence on exports for growth.
China’s inflation rate jumped to a 19-month high of 3.1 percent in May. Central-bank dollar buying has left the nation with $2.4 trillion in currency reserves, the world’s largest holding.
Global stocks may rise on the potential benefits of the policy shift for trading partners including the U.S., David Cohen, an economist at Action Economics in Singapore, said today. Societe Generale SA said yuan-denominated A-shares may advance tomorrow on the likelihood of currency gains boosting Chinese companies’ purchasing power.
BHP Billiton Ltd. and Rio Tinto Group, the world’s largest and third-largest mining companies, may benefit from increased Chinese demand, fund manager Saxon Nicholls, of Herschel Asset Management Ltd. in Melbourne, said today.
‘Crisis’ Policy
“China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui, an adviser on the People’s Bank of China’s policy board, said in an interview yesterday. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.”
Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation.
Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which might have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings.
Export Rebound
China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. A narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of yesterday’s statement. The Chinese version said no “large-scale volatility.”
Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.
“Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” yesterday’s statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.
June 20 (Bloomberg) -- China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.
The decision was made after the world’s third-largest economy improved, the central bank said in a statement on its website yesterday, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged.
“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”
The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner’s policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.
‘Very Cautious’
A question-and-answer document published by the central bank on its website today said Chinese companies will have time to adapt to yuan changes and reaffirmed a government policy of “gradualism” in exchange-rate reform. Increased yuan flexibility and “two-way movements” by the currency will aid management of the economy, it said.
Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said today’s statement acknowledges that the yuan will appreciate and suggests daily volatility may increase, while highlighting that the government remains “very cautious” and will control the pace of gains.
“This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill told Bloomberg Television in St. Petersburg, Russia.
“It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”
Geithner’s Praise
Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.
China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.
“It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Prasad, a former head of the China division at the International Monetary Fund.
Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.
The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi.
‘Vote of Confidence’
“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., said in an e-mail. “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.”
Chinese companies focused on the domestic market, including Beijing-based computer maker Lenovo Group Ltd., said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy,” Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said then.
Freedom to Move
A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said last week. The central bank agreed today, saying benefits could include curbing price gains, asset bubbles and dependence on exports for growth.
China’s inflation rate jumped to a 19-month high of 3.1 percent in May. Central-bank dollar buying has left the nation with $2.4 trillion in currency reserves, the world’s largest holding.
Global stocks may rise on the potential benefits of the policy shift for trading partners including the U.S., David Cohen, an economist at Action Economics in Singapore, said today. Societe Generale SA said yuan-denominated A-shares may advance tomorrow on the likelihood of currency gains boosting Chinese companies’ purchasing power.
BHP Billiton Ltd. and Rio Tinto Group, the world’s largest and third-largest mining companies, may benefit from increased Chinese demand, fund manager Saxon Nicholls, of Herschel Asset Management Ltd. in Melbourne, said today.
‘Crisis’ Policy
“China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui, an adviser on the People’s Bank of China’s policy board, said in an interview yesterday. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.”
Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation.
Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which might have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings.
Export Rebound
China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. A narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of yesterday’s statement. The Chinese version said no “large-scale volatility.”
Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.
“Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” yesterday’s statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.