21 June 2010
Asian stock markets rose sharply Monday after China said it would allow its currency the yuan to rise and promised more currency flexibility. The rate of the yuan edged up to 6.8110 against the dollar on currency markets by midday Monday - its strongest level since September 2008.
The markets' optimism follows the China central bank's weekend announcement it was unshackling the yuan from its de facto 23-month-old peg.
The Chinese central bank pledged to make its currency more flexible.
It said the proposed reform had been made possible by the global recovery. But it gave no details about the timing of any moves - and it ruled out any single large-scale revaluation of the yuan, saying there was no basis for big fluctuations or changes.
The move should ease pressure from countries that claim China undervalued its currency to make its products cheaper.
A stronger yuan would make Chinese exports more expensive, help redress trade balances and bring some relief to foreign manufacturers struggling to compete.
But while the overall mood is positive, not all analysts are impressed by China's announcement.
Many economists suspect Beijing will nudge the exchange rate higher in increments – not in leaps as many have demanded and hoped for.
Vincent Chan, the head of China Research Investment Bank Division at Credit Suisse in Hong Kong, says the change will have little affect on the world's financial fortunes.
"One word. Over reaction," said Chan. "Everybody seems to be getting hysterical about the appreciation. But they need to ask the question – how much is it going to really appreciate? At 5 per cent per annum, it's basically a non event."
Chan says the move will have more political significance.
The announcements by China's central bank came just a week before leaders of the world's 20 major economies gather in Toronto, Canada, for a two-day meeting. Chinese president Hu Jintao will attend the G-20 summit, where China's exchange rate policies are expected to be an agenda item.
U.S. and European politicians have long argued the yuan is undervalued, giving China an unfair trade advantage.
U.S. President Barack Obama welcomed China's decision, calling it a "constructive step".
China's state media have been ordered by the government to play down the announcement.
Many Chinese see the move as Beijing bowing to U.S. demands.