China says no major change expected in exchange rate following move toward greater flexibility

By Christopher Bodeen, AP
Sunday, June 20, 2010

China says no major changes in exchange rate

BEIJING — China’s central bank said Sunday it would maintain a stable exchange rate and didn’t anticipate major changes in the value of the yuan, a day after saying it would manage the currency more flexibly.

In a commentary on Saturday’s announcement, the People’s Bank of China attempted to assuage fears of a major strengthening of the yuan, also known as the renminbi, or “people’s money.”

“There is at present no basis for major fluctuation or change in the renminbi exchange rate,” the bank said on its website.

Keeping the rate at a “reasonable, balanced level” would contribute to economic stability and help restructure the Chinese economy with greater emphasis on services and consumption, the statement said.

The yuan’s value has been pegged to the U.S. dollar for two years, a major source of friction with countries who say the yuan is undervalued to China’s own benefit. The bank’s statement said it would rely more on a basket of currencies that includes the U.S. dollar to determine the exchange rate.

Chinese officials have long said reforms to the currency would be gradual. While no specific policy changes were mentioned, financial markets will be watched closely Monday for any effects.

President Barack Obama said China’s move would help protect the economic recovery, while the European Commission said it would benefit “both the Chinese economy and the global economy.”

The announcement, timed just before President Hu Jintao’s trip to the G-20 summit in Toronto, Canada, follows warnings from Beijing last week against making its currency policies a main focus of the meeting. China has come under heavy pressure to reform from G-20 member countries, including South Africa and Brazil as well as the United States and those in Europe, who argue that the yuan is deliberately undervalued to keep Chinese exports unfairly cheap.

Industrial Bank economist Jiang Shu said the timing of the announcement marked an attempt to divert criticism of China at the meeting.

“It’s a way of throwing out the carpet for the G-20, displaying again to international society the Chinese government’s determination on the exchange rate issue,” Jiang was quoted as saying on the website of the National Business Daily, a leading financial newspaper.

However, some Chinese experts and commenters on Internet message boards criticized the announcement as a cave-in to foreign pressure that would ultimately damage China’s crucial export sector.

“From an economic angle, the appreciation of the renminbi will have a definite effect on exports, but in terms of politics and macroeconomic policy, it can be seen as a result of the need for balance,” said Zhao Xijun, deputy dean of the School of Finance of Renmin University.

Also writing on the National Business Daily website, economist Ye Tan said the move would pile pressure on exporters already contending with a roughly 15 percent appreciation of the renminbi against the euro, as well as rising labor costs.

“China’s exports are unstable and this is having a major impact on the actual economy,” Ye wrote. “Appreciation of the renminbi needs to wait until economic readjustment is certain and China’s domestic demand has truly expanded,” Ye said.

On the message boards at the popular Sohu.com portal, commentators vilified the move as a sellout that betrayed long-standing government claims that the exchange rate was not a problem. Some commentaries on there and other forums were quickly removed by censors drilled to stymie criticism of the government or discussion of sensitive topics.

Beijing has kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand. Under pressure from its trading partners, China began letting the yuan appreciate gradually against the U.S. dollar in 2005, but halted that abruptly in 2008 as the global financial crisis took effect.

Since then, the yuan’s value has remained at roughly 6.83 to $1.

Online:

www.pbc.gov.cn/

(This version CORRECTS spelling of fluctuation in graph 3)

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