China To Allow Gradual Appreciation Of Rmb

Chinas central bank said on Saturday that it would allow a more flexible yuan

, signaling an end to the currencys two-year peg to the U.S. dollar.

The statement, posted on the web site of the Peoples Bank of China, said the decision to increase the RMBs exchange rate flexibility was made because of the improving economy but that any large-scale appreciations had been ruled out. The RMBs 0.5 percent daily trading band will remain the same.

It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility, the statement said.

China began a gradual appreciation of the RMB against the U.S. dollar in 2005, but halted it 2008 as the Global Financial Crisis began to unfold. Since then, the RMB has remained at roughly 6.83 to US$1.

The decision to allow the RMB to appreciate again comes ahead of Chinese President Hu Jintaos trip to meet G-20 leaders in Toronto on June 26-27, and may help to deflect criticism and ease pressure on China from U.S. lawmakers among others. Beijing warned earlier this week against making the yuan a main focus of the meeting.

We welcome Chinas decision to increase the flexibility of its exchange rate, U.S. Treasury Secretary Timothy Geithner said in a statement issued in Washington. Vigorous implementation would make a positive contribution to strong and balanced global growth. We look forward to continuing our work with China in the G-20 and bilaterally to strengthen the recovery.

China has faced pressure from the United States and other trading partners who say the yuan is undervalued. The statement on Saturday indicated no major policy changes.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies, the statement said. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

by: Dezan Shira & Associates

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