China’s new yuan regime looks a lot like the old one

BEIJING – China will keep the yuan’s exchange rate at a basically stable level, the central bank said yesterday, suggesting that the country’s new currency regime will look a lot like the old one.

China announced on Saturday that it would resume making the yuan more flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.But in a lengthy statement about how reform would proceed, the central bank explicitly ruled out a one-off revaluation, repeatedly said there was no basis for any big appreciation and added that the currency’s value was not far off its fair level.Lack of a real rise in the exchange rate would provide ammunition for critics, especially hawks in the US Congress, who say Beijing’s actions will speak louder than its words and that penalties should be imposed if it keeps the yuan artificially cheap.Leaders of the United States, the European Union, Japan and the International Monetary Fund, among others, welcomed its vow to deepen yuan reform as a hopeful contribution to the balancing of the world economy. All eyes today will be on the daily reference rate set by the Chinese central bank to manage the yuan’s value. Many economists believe that Beijing will nudge the exchange rate higher in increments, not leaps.Global equity markets may rally as the news, coming a week before a Group of 20 meeting in Canada, eases fears of a trade row between the United States and China at a delicate time for the world economy.The central bank yesterday promised to implement ‘dynamic management and adjustment’, which could lead to the yuan falling, not just rising, against the dollar depending on how other currencies perform.But the crux of the exchange rate system would be the same as it had been previously, meaning that the yuan is likely at most to return to the path of gradual gains against the dollar seen for three years until mid-2008.’Keeping the yuan basically stable at a reasonable and balanced level is an important part of further promoting reform of yuan exchange rate formation mechanism,’ the People’s Bank of China said.It said that gradual adjustment was needed in order to give firms time to adjust. Chinese economists said the move was justified economically and, above all, had a political aim.’This important declaration by the Chinese government coming before the G20 summit is a big concession to prevent the yuan’s exchange rate from being politicised by Western countries,’ said Gao Shanwen, chief economist at Essence Securities in Beijing.China said that freezing the yuan to the dollar since July 2008 had helped mitigate the impact of the global financial crisis and spur the world’s recovery.With the economy on more solid footing, it was time to enhance the exchange rate’s flexibility, though there were no grounds for ‘large-scale appreciation’, it said.Markets have long been waiting for China to break the yuan’s peg to the dollar, but the timing still came as something of a surprise.One day earlier, senior officials had stressed that China would not be bullied into resuming yuan appreciation.The country’s major newspapers carried no real reports of the policy about-face, just reprinting the central bank’s statement verbatim.The lack of articles and commentaries for the time being likely reflected a push by the government to get everyone on message about what could be a controversial policy change.Whether US critics of China’s currency regime will agree remains to be seen.Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country’s export juggernaut roared back to life.Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China’s policy is seen as stealing jobs from foreign markets.US patience with Beijing over the yuan has worn thin and lawmakers threaten to penalise it for a strategy they say is unfair and breaks rules of global trade.Democratic US Senator Charles Schumer, a leading critic, said China’s statement was too vague and pledged to press ahead with legal action to raise trade barriers.US Treasury Secretary Timothy Geithner, who has delayed publication of a potentially embarrassing report that could cite China as a currency manipulator, stressed that China’s actions would speak louder than words. ‘This is an important step but the test is how far and how fast they let the currency appreciate,’ he said. – Nampa-Reuters