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China's central bank to allow more exchange rate flexibility

The People's Bank of China cites the recoveries in both the global and Chinese economies as the reason for its decision. The move suggests the country is ready to raise the yuan against the dollar.

June 19, 2010|David Pierson, Los Angeles Times

Reporting from Beijing —

China's central bank said Saturday that it would permit more flexibility in the nation's currency — a move that suggested the country was ready to raise its exchange rate modestly against the dollar.

In a statement posted on its website, the People's Bank of China said the decision was prompted by recoveries in both the global and Chinese economies.

President Obama welcomed the news. "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," he said in a statement.

U.S. Treasury Secretary Timothy F. Geithner called the move an "important step." But he added, "The test will be how far and how fast they let the currency appreciate."

China's currency, known as both the yuan and renminbi, has been pegged at around 6.83 to the dollar since the outbreak of the financial crisis in 2008.

"The global economy is gradually recovering," the central bank said. "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the [yuan] exchange rate regime and increase the [yuan] exchange rate flexibility."

The yuan's link to the dollar the last two years has exacerbated an already tense relationship between Beijing and trade competitors such as the United States that believe the Chinese currency is undervalued by over 25% to make Chinese exports artificially cheap.

Chinese officials have persistently rejected the charges, likening criticism of their exchange rate policy to attacks on sovereignty. Complicating any Chinese move to appreciate the yuan will be the perception that Beijing has bowed to international pressure.

Many analysts have predicted about a 3% increase against the dollar this year to combat inflation. China's economy is flush with excess liquidity after a record amount of new bank lending was approved during the worst of the financial crisis.

"A more flexible [currency] will be welcomed by some of China's critics. But it is clearly unlikely to appease those calling for large revaluation," said Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland. "Tensions will accordingly persist, especially heading into the U.S. November elections, and should Europe's economic woes worsen."

david.pierson@latimes

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