21
Jun
Chinese yuan flexibility comments buoy markets
Stock markets and Asian currencies have risen after weekend
comments by China's central bank about its yuan policy.
Hong Kong's Hang Seng stock market index rose 3% in Monday
trading, while the Japanese Nikkei closed up 2.4%.
Currencies including the Korean won, Malaysian ringgit and
Japanese yen were also up 1-2% on the news.
Chinese authorities announced plans on Saturday to make the
exchange rate more flexible, while ruling out a large, one-off move
in the exchange rate.
China's central bank says it plans to keep the Chinese yuan
"stable" and there will be no immediate revaluation of the
currency.
The move, ahead of the G20 summit later this month, has tempered
market fears of a possible trade war between China and the US.
European stock markets also reacted positively, with the FTSE
100 rising 1.4% in early trading, while the French and German
markets were up by about 1.7%.
New yuan high
Markets now expect China to weaken or break the two-year peg of its
currency to the dollar.
The Chinese central bank currently sets a target exchange rate
against the dollar each day.
Monday's target level was unchanged from Friday, signalling that
the central bank is in no hurry to allow the yuan to rise.
But with mounting speculation over the change in policy, markets
pushed the exchange rate up 0.4% above the target in early trading,
to its highest level since 1994.
Officially, the central bank allows the currency to move up or
down 0.5% against the central parity, but in practice such
movements have rarely been allowed in the past.
"There is surprise over the level of flexibility already shown
today," said Stephen Green, head of China research at Standard
Chartered Bank.
He now expects the central bank to allow the yuan to appreciate
some 2-3% over the next 12 months.
The change in policy will also make it easier for Asian
countries that compete with China for exports to allow their own
currencies to rise.
The Korean won rose 2.7% above Friday's close, while the
Malaysian ringgit was up 2.1%.
Pressure
The Chinese have found themselves in a tough situation over the
yuan in recent months.
The country has come under increasing international pressure -
particularly from the US and India - to change its currency
policy.
The US has complained that China is artificially keeping the value
of the yuan low to help its exporters at the expense of foreign
competitors.
On Saturday, US President Barack Obama welcomed China's promise
of increased flexibility in exchange rates, but the Chinese central
bank's latest comments cast doubt over the scale of its plans.
"There is at present no basis for major fluctuation or change in
the [yuan] exchange rate," the bank's website said.
Meanwhile, the euro has fallen more than 17% against the dollar
- and therefore also against the yuan - since the European debt
crisis began in December.
Europe is China's biggest export market, meaning the euro's
decline has made Chinese exports less competitive.
The change in yuan policy may involve switching the peg from the
dollar to a basket of currencies, including the euro, that better
reflect China's diverse export markets.
G20 agenda
The "basic stability" of the currency would be maintained, the
central bank added, and keeping the yuan at a "reasonable, balanced
level" would help ensure economic stability.
"The management and adjustment of the [yuan] exchange rate needs
to be done in a gradual way."
China's currency policy was expected to be high on the agenda at
the G20 summit to be held in Toronto later this month.
According to the BBC's economics editor Stephanie Flanders, the
timing of China's concession is no coincidence.
"As usual, the wording is vague," she said.
"But the assumption must be that China plans to move back to the
policy of allowing its exchange rate to appreciate in real terms
against the dollar."
Article: 21st June 2010
www.bbc.co.uk/new