China has decided to take the heat out of the exchange rate brawl with the US by again making its Yuan exchange rate more flexible.
China’s central bank said it will gradually make the Yuan’s exchange rate more flexible, indicating that it was ready to break a 23-month-old dollar peg that has come under intense criticism from the US and other countries.
"China’s central bank has decided to further promote the reform in the RMB (Yuan) exchange rate mechanism, and strengthen the flexibility of the RMB exchange rate," the bank said on its website on Saturday.
The statement was released amid growing pressure on Beijing to strengthen its currency and comes ahead of the G20 nations meeting in Toronto next weekend.
However, the central bank said there were no grounds for "large swings or change" in the exchange rate and reiterated that it will continue to manage the floating exchange rate "within the band already announced".
And in a second statement on Sunday, the central bank made it clear we should not wait for big increases, as some silly Americans are forecasting/hoping for.
The central said yesterday that it will implement "dynamic management and adjustment," which could lead to the yuan falling, not just rising, against the dollar depending on how other currencies perform.
The bank said the 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 said, adding that gradual adjustment was needed in order to give firms time to adjust.
China operated a currency peg with the US dollar until July 2005 when it introduced a managed float under which the Yuan appreciated around 21% against the US dollar.
However, since mid-2008 the currency has been effectively pegged to the dollar at around 6.83.
Although the official policy since 2005 has been that the exchange rate tracks a basket of currencies – an approach reaffirmed in Saturday’s statement – the principal point of reference has been the greenback.
The central bank sets a daily rate for the currency against the dollar, which can trade within a band of 0.5%, up or down.
China pegged the Yuan to the dollar since July 2008 to support exporters hit by the financial crisis and preserve jobs.
Pegging the currency to the US currency has seen the Yuan rise as the euro fell, and the value of currencies such as the South Korean won (South Korea is a major trade competitor of China’s in areas like consumer electronics and ship building).
The dollar is up around 20% against the euro since late 2009, meaning the Yuan is higher as well.
That has made Chinese exports to Europe more expensive (Europe has been China’s biggest market so far this year, but demand from the US is returning) and made China a more appealing export destination for European countries, especially Germany.
The Group of 20 leaders summit in Toronto next weekend was expected to see pressure for a Yuan move.
American politicians have been claiming that by pegging the Yuan to the dollar, China has gained a trade advantage that costs US jobs.
(US jobs were lost by the intensity of the recession and the lack of demand.)
China points out that its trade surplus has shrunk significantly in the past 18 months as imports have risen faster than exports because of huge stimulus spending since late 2008.
That has enabled the Chinese economy to resume growing quickly.
But it will soon slow as the spending impact eases.
The World Bank bought into the China cooling story, saying on Friday that the country’s economy is showing signs of softening after its strong stimulus-fuelled rebound last year.
The Bank said in its latest quarterly update released Friday that industrial production and other key indicators show the pace of growth moderating, albeit remaining relatively strong, supported by real estate investment and a recovery in export demand.
"China’s economic outlook remains favourable," the World Bank said, forecasting growth at 9.5% this year and 8.5% in 2011, with "risks both ways".
The bank said that after the surging in growth to an annual rate of 11.9% in the March quarter, the economy is certain to decelerate in coming months.
The Update, a regular assessment of China’s economy, finds that so far in 2010 the slowdown in government-led investment (GLI) after last year’s massive stimulus has partly been offset by strong real estate investment.
Household consumption growth has held up well, reflecting a favorable labor market.
Leading indicators and industrial production data suggest some moderation of the pace of growth in the second quarter, although that pace is still rapid.
"Export volumes have recovered rapidly since the trough in early 2009," the update said.
"Nevertheless, China’s trade surplus has declined further due to surging import volumes and declining terms of trade. Inflation has picked up somewhat, but core inflation remains low.
"However, soa
