China floats Renminbi’s peg to US dollar
China has bowed to intense foreign pressure and growing domestic economic imbalances by revaluating the renminbi and replacing its decade-old currency peg with a more flexible exchange rate regime.
The People's Bank of China, the central bank, on Thursday announced a 2.1 per cent revaluation and a system that set the currency’s value with reference to a basket of unspecified currencies.
Since 2000, the renminbi had been trading against the dollar within the range of 8.276 to 8.28. Starting Friday, it can fluctuate by 0.3 per cent against the dollar in daily trading while moving in a wider band of 1.5 per cent, up or down, on currencies other than the dollar.
The decision is a victory for the administration of President George W. Bush, which had urged Beijing to revalue but also fended off congressional demands for trade sanctions if China refused to move.
John Snow, US Treasury secretary, said the mechanism provided “significant amplitude for the currency to move”. The Treasury would track how well it reflected underlying market conditions over time, officials said.
A senior Treasury official added: “They have not indicated that it is capped. We take them at their word at this point that this mechanism will be orientated toward market supply and demand.”
The International Monetary Fund called for maximum currency flexibility under the new system, saying it would allow Beijing to run a more independent economic policy.
The Group of Seven leading industrial nations lauded China’s decision to revalue its currency, saying it would help global economic growth.
“This more flexible exchange rate regime will contribute towards global economic growth and stability,” ministers said.
Beijing's policy change was consistent with its aim of modifying the currency system only gradually, to maintain the economy's high growth rate. The intention, the bank said, was to “promote basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability”.
With China's trade surplus rising sharply and its foreign exchange reserves reaching a record $711bn last month, the bank's ambition of equilibrium in the balance of payments also suggested Thursday's small revaluation would not be the last. The bank said market developments would influence its decisions to make more adjustments to the renminbi's value.
China hopes the announcement will ease rising tensions with the US and clear the way for a successful visit to Washington in September by Hu Jintao, China's president.
Analysts said the revaluation, although small, and the introduction of more currency flexibility, would help boost consumption in China and take the steam out of rapidly growing exports, now rising by 30 per cent a year. “Both domestic fiscal and monetary policies are likely to gear towards stimulating domestic demand,” said Hong Liang, of Goldman Sachs, in Hong Kong.
The renminbi was steady at 8.11 to the dollar by midday Friday while US 10-year Treasuries recovered in Asia after yields hit a two-month high overnight. Investors were concerned that China, as it dropped the dollar peg, would begin reducing the amount of foreign exchange reserves held in US assets and debt instruments. Trading in Singapore on Friday showed, however, that the market had calmed and was seeing a fair amount of bargain-hunting.
In an immediate response to the renminbi move, Malaysia also dropped its currency peg against the US dollar and switched to a managed float against a basket of currencies. On Friday, the ringgit rose 0.46 per cent to 3.783 against the dollar by midday.
The currency, which remains untradeable offshore, was fixed at 3.8 to the dollar in 1998
The People's Bank of China, the central bank, on Thursday announced a 2.1 per cent revaluation and a system that set the currency’s value with reference to a basket of unspecified currencies.
Since 2000, the renminbi had been trading against the dollar within the range of 8.276 to 8.28. Starting Friday, it can fluctuate by 0.3 per cent against the dollar in daily trading while moving in a wider band of 1.5 per cent, up or down, on currencies other than the dollar.
The decision is a victory for the administration of President George W. Bush, which had urged Beijing to revalue but also fended off congressional demands for trade sanctions if China refused to move.
John Snow, US Treasury secretary, said the mechanism provided “significant amplitude for the currency to move”. The Treasury would track how well it reflected underlying market conditions over time, officials said.
A senior Treasury official added: “They have not indicated that it is capped. We take them at their word at this point that this mechanism will be orientated toward market supply and demand.”
The International Monetary Fund called for maximum currency flexibility under the new system, saying it would allow Beijing to run a more independent economic policy.
The Group of Seven leading industrial nations lauded China’s decision to revalue its currency, saying it would help global economic growth.
“This more flexible exchange rate regime will contribute towards global economic growth and stability,” ministers said.
Beijing's policy change was consistent with its aim of modifying the currency system only gradually, to maintain the economy's high growth rate. The intention, the bank said, was to “promote basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability”.
With China's trade surplus rising sharply and its foreign exchange reserves reaching a record $711bn last month, the bank's ambition of equilibrium in the balance of payments also suggested Thursday's small revaluation would not be the last. The bank said market developments would influence its decisions to make more adjustments to the renminbi's value.
China hopes the announcement will ease rising tensions with the US and clear the way for a successful visit to Washington in September by Hu Jintao, China's president.
Analysts said the revaluation, although small, and the introduction of more currency flexibility, would help boost consumption in China and take the steam out of rapidly growing exports, now rising by 30 per cent a year. “Both domestic fiscal and monetary policies are likely to gear towards stimulating domestic demand,” said Hong Liang, of Goldman Sachs, in Hong Kong.
The renminbi was steady at 8.11 to the dollar by midday Friday while US 10-year Treasuries recovered in Asia after yields hit a two-month high overnight. Investors were concerned that China, as it dropped the dollar peg, would begin reducing the amount of foreign exchange reserves held in US assets and debt instruments. Trading in Singapore on Friday showed, however, that the market had calmed and was seeing a fair amount of bargain-hunting.
In an immediate response to the renminbi move, Malaysia also dropped its currency peg against the US dollar and switched to a managed float against a basket of currencies. On Friday, the ringgit rose 0.46 per cent to 3.783 against the dollar by midday.
The currency, which remains untradeable offshore, was fixed at 3.8 to the dollar in 1998
posted by Drs Search @ 8:05 AM
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