BEIJING : China revalued its currency and scrapped the yuan's
decade-old peg to the US dollar in favour of managed float against
a basket of currencies, caving in to intense pressure from trading
partners led by the United States.
The currency was fixed at 8.11 yuan to the US dollar compared to
the old rate of 8.2765 yuan, effectively a two percent
revaluation.
The move was effective from 1100 GMT.
The US dollar dropped sharply against several Asian currencies
following the announcement, sinking to 110.38 yen - its lowest
level since June 30 - from 112.50 yen before the move.
"From today, the renminbi rate against the US dollar will
appreciate by two percent," said the website of China's central
bank, the People's Bank of China, (PBOC). "One US dollar will
exchange for 8.11 yuan."
Almost simultaneously, Malaysia scrapped the ringgit currency's peg
to the US dollar and said it would move to a managed float.
The PBOC said it was scrapping the yuan peg to the US dollar and
setting the Chinese unit against a trade-weighted basket of
currencies.
It did not reveal what these currencies were.
Previously, the foreign exchange trade centre had suggested such a
basket could include some or all of the following - the Hong Kong
dollar, the yen, the pound, the Swiss franc, the Australian dollar,
Canadian dollar and the euro.
The daily trading price of the yuan versus the dollar will be
allowed to move within a band of 0.3 percent, while the non-US
dollar currencies will be allowed to move in yet-to-be announced
bands, the central bank said.
China's yuan, or renminbi, has been pegged to the US dollar at 8.28
since 1997.
The last time the government changed its currency regime was in
1994 when Beijing devalued the yuan by over 50 percent, from around
5.70 to 8.30, from where it moved up to 8.28 by 1997 where the
authorities held it ever since.
China's trade partners, especially the United States, have stepped
up pressure for a revaluation in recent months, arguing an
undervalued yuan gave Beijing an unfair trade advantage, helping
inflate the US trade deficit.
US manufacturers contend that China's fixed currency system has
undervalued the yuan by as much as 40 percent, making Chinese
products cheaper in the domestic market and American goods more
expensive in China.
US Treasury Secretary John Snow had warned China that if it did not
move on its currency by mid-October, the White House was prepared
to name China as a currency manipulator, a move that might have led
to trade retaliation.
Congress had threatened to pass a bill proposed by New York
Democratic Senator Charles Schumer to slap a 27 percent punitive
tariff on imports of textiles from China if it failed to act.
The PBOC said Thursday the move is aimed at solving a host of
problems that the pegged system against the US dollar had been
causing on the back of China's rapid economic expansion.
"The move is aimed at easing trade imbalances, boosting domestic
demand and increasing Chinese companies' competitiveness," the PBOC
said.
"It will also help to increase the independence of monetary policy,
improve the effectiveness of financial controls, help maintain the
basic balance of imports and exports to improve trade conditions,
stabilize prices and cut corporate costs."
It indicated further changes could be made "when necessary
according to market developments as well as the economic and
financial situation."
Analysts said the revaluation move was less than they had expected
and was more of a symbolic gesture, with little impact on
trade.
"It's a very small move. China is not in the position to make any
big moves," said Andy Xie, China economist at Morgan Stanley in
Hong Kong.
The revaluation will have "almost zero" impact on trade and will
not change prices for American consumers although it could silence
critics for now by showing China was willing to move in the right
direction, Xie said.
"The Chinese currency cannot move too much too soon because it's
still a relatively undeveloped country...The government is making a
gesture and hope the American politicians can understand
this.
"When exporters accept the changes as natural and become more
profitable, maybe the currency can move more in the future."
Other economists said they expect another revaluation by year end
while Japan immediately welcomed China's move as a "first step" to
internationalize its economy. - AFP /ch
