China vows increased currency flexibility

[Garp]

China vows increased currency flexibility

By Geoff Dyer in Beijing and Alan Beattie in Washington

Published: June 19 2010 14:41 | Last updated: June 19 2010 17:34

China said on Saturday it will effectively abandon its currency peg with the US dollar, in a move that appeared to be an attempt to defuse mounting international criticism of its exchange rate, especially in the US.

The Chinese central bank said in a statement on Saturday night that it would increase the flexibility of the exchange rate, an indication that it will resume a policy of gradual appreciation of the renminbi against the dollar after nearly two years when the rate has remained unchanged.
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The announcement comes one week before the G20 summit in Toronto where the level of the renminbi was shaping to be one of the dominant issues. President Barack Obama called on Friday for currency flexibility as an essential part of the global economic recovery.

On Saturday, Mr Obama said: “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy.”

However, the central bank statement suggested that shifts in the exchange rate are likely to be slow, which could result in continued international criticism that the renminbi is artificially low. The People’s Bank of China said there was no basis for a large-scale appreciation, given the sharp drop in China’s current account surplus over the last year, and that the current trading bands for the currency would remain in place.

The central bank said that the dollar peg had served a role when the international crisis “was at its worst” but that the “the global economy is gradually recovering” and the rebound in the Chinese economy was more “solid”.

International response

●French President Nicolas Sarkozy and Russian Finance Minister Alexei Kudrin on

Saturday welcomed China’s move towards greater flexibility of the renminbi exchange rate.

“The recent declarations of the Chinese authorities on the yuan are encouraging” Mr Sarkozy said during a visit to Russia.

“It will not affect us for now, although on the whole it is positive” Mr Kudrin said. “It will not affect our trade significantly.”

● The European Commission welcomed a move by China on Saturday to make its renminbi exchange rate more “flexible” saying it would be positive for China and the world economy and help correct global imbalances.

“The European Commission welcomes The People’s Bank of China decision to proceed further with the reform of the RMB exchange rate regime and to resume the RMB exchange rate flexibility,” it said in a statement.

“It considers that such a move will be beneficial for both the Chinese economy and the global economy. The European Commission looks forward to work closely with the Chinese authorities bilaterally and in the G20 to address successfully the current challenges to the global recovery.”

● Japan’s finance ministry said on Saturday it welcomed China’s announcement on foreign exchange reform and its strengthening of a more flexible yuan.

“We expect this move to contribute towards a stable and balanced growth in China, Asian economies, as well the global economy,” it said in a statement.
Compiled by Reuters

Tim Geithner, US Treasury secretary, said: “We welcome China’s decision to increase the flexibility of its exchange rate.” But had added that “vigorous implementation” was needed to help boost the global economy.

“This is an important step, but the test will be how far and how fast they let the currency appreciate, “ Mr Geithner said.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, also said it was “a very welcome development” that China was returning to its pre-crisis managed floating exchange rate regime.

However, some observers said that any appreciation in the Chinese exchange rate is likely to be very modest, which might not be enough to appease critics of China’s policy in the US Congress who are pushing for more aggressive appreciation.

“The danger is that on Monday morning everyone gets very excited and then end up being disappointed with what happens. There is very little appetite for appreciation, so in the short-term the central bank is likely to be very conservative,” said Stephen Green, an economist at Standard Chartered. “As a result, the US-China relationship could still be very tricky.”

A group of US lawmakers, led by Senator Charles Schumer, have been pushing for a bill that would allow the government to impose duties on countries with exchange rates that were held artificially low.

Mr Schumer said on Saturday that Beijing would need to spell out just how far it will let the renminbi rise. “This vague and limited statement of intentions is China’s typical response to pressure,” he said. “Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules.”

As criticism has been growing in Washington in recent weeks, China has generally struck a defiant tone, with a Xinhua commentary last weekend referring to some US lawmakers as “baby-kissing” incompetents.

On Thursday, a senior government official warned the other G20 governments not to use the upcoming summit as a platform for “finger-pointing”.

China operated a currency peg with the US dollar until July 2005 when it introduced a managed float under which the renminbi appreciated around 21 per cent against the US dollar. However, since mid-2008 the currency has been effectively pegged to the dollar at around Rmb6.83.

Although the official policy since 2005 has been that the exchange rate tracks a basket of currencies – an approach reaffirmed on Saturday – the principal point of reference has been the dollar. The central bank sets a daily rate for the currency against the dollar, which can trade within a band of 0.5 per cent, up or down.

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[tabs]

I think that the Chinese calling US cngressional members, "Baby kissing incompetents." is funny..

However on a serious note..American astutness on financal matters is increasingily coming into question. No longer is America going to be viewed as the bastion of financial sagacity.

[tabs]

This is my take on Charlie Schumer..in which I posted it on the CR web forum on 11/01/08



My old uncle whispered in my ear just before they swung the trap on em, "Never wise up a chump Tabs." However never being a good listener or taker of advice, one can not help refrain from saying, How the he11 did NY ever elect a guy like Schumer? He would not pass the test of the farmers in Indiana and even Iowans would spot him for what he is. So how did he ever get past the sophisticates of NY? Schumer is the class clown always grandstanding for attention that he never received at home. Is there a mirror that he does not look into to see his own reflection? Ohhh so that's what it is..Nyers understand any guy who is so busy admiring himself in the mirror and in love with his own voice is too busy to steal from them!

Hmmmm..Of course there is another explanation for Nyers electing Schmer to Congress and that was to get him out of town so that somebody else would be forced to listen to him. However just electing him to the House only got rid of him for 2 years at a time. So NYers decided to elect him to the Senate so they only would have to hear from him once every 6 years.

Maybe if Obama is elected President, Obama will make Schumer Ambassador to France. For that is one war we could not lose.

[red-beard]

Schumer got in because of the same reason Obama became Senator: His opponents campaign imploded. D'amato had a couple of open mike incidents.

[jyl]

China is at the stage where it needs to develop a more balanced economy, with stronger domestic and consumer demand. This is for economic reasons: export demand is volatile and cyclical, and depends on the policies and decisions of other countries. There is also a social aspect: wealth inequality in China is an increasing issue.

Gradually raising the RMB's value is one way to build up the domestic consumer economy.

For obvious reasons, China wants it to be done gradually and in a controlled way.

[tabs]

Originally Posted by jyl

China is at the stage where it needs to develop a more balanced economy, with stronger domestic and consumer demand. This is for economic reasons: export demand is volatile and cyclical, and depends on the policies and decisions of other countries. There is also a social aspect: wealth inequality in China is an increasing issue.

Gradually raising the RMB's value is one way to build up the domestic consumer economy.

For obvious reasons, China wants it to be done gradually and in a controlled way.

JYL you also forgot the obvious reason for the Chinese not wanting to revaluate the RMEB too quickly..they devalue their USD & denominated positions.

[john70t]

Originally Posted by tabs

However on a serious note..American astutness on financal matters is increasingily coming into question. No longer is America going to be viewed as the bastion of financial sagacity.

Still think that deregulation/anarchy is applicable in today's time?
(though I wish it was)

There was a yahoo news article yesterday about how Canadian RE and banking didn't suffer the fallout, and is doing just fine right now. Same with North Dakota.

[red-beard]

Or Texas

[jyl]

Originally Posted by tabs

JYL you also forgot the obvious reason for the Chinese not wanting to revaluate the RMEB too quickly..they devalue their USD & denominated positions.

Agree, there are many reasons why China wants RMB to rise gradually not rapidly. Protecting their USD holdings is one thing, although the gains on USD vs EUR must be feeling pretty nice - figure that the world of things that China buys is mostly in USD and EUR, and they've made a nice recent gain on the EUR part. Controlling the flow of hot money into RMB and RMB-denominated assets (like real estate) is another. Allowing Chinese businesses and their overseas customers to adjust/cope with FX change is another.

Did some reading on other countries that made the transition from export-dominated economies to more balanced export + domestic economies. Japan, So Korea, Taiwan, etc. The best approach appears to have been to combine currency revaluation with domestic demand stimulus. But China just did a big stimulus, and recently has been trying to pull back on the stimulus in hopes of deflating the real estate bubble, heading off rising inflation, and who knows what the real numbers are on bad loans in China. I wonder if they feel like they need to wait a while before they'll feel able to turn up the stimulus wick again. If so, they might feel like they need to go slow on the RMB for now.