BEIJING, July 21: China finally bowed to two years of political and market pressure on Thursday by revaluing the yuan by 2.1 per cent and leaving the door open to further rises by abandoning the currency’s decade-old peg against the dollar. Analysts described the long-awaited move as modest and said it would have a limited economic impact. But they said the shift, ahead of a US visit in September by President Hu Jintao, made good political sense and potentially marked a critical step by China’s policy makers toward giving more play to market forces.
“The most important thing is the change, not how much it changed,” said Li Yang, a senior economist with the Chinese Academy of Social Sciences in Beijing.
US Treasury Secretary John Snow applauded the shift as a significant contribution to global financial stability, while a senator who has been a leading critic of Beijing’s currency policies called it a welcome “first baby step”.
“If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome,” Sen. Charles Schumer, a New York Democrat, said in a statement.
After keeping the yuan virtually fixed near 8.28 per dollar since 1996, China said that as of 7 p.m. (1100 GMT) it was adjusting the currency’s value to 8.11 and tying it to a basket of currencies of China’s main trading partners.
The central bank said the yuan would be allowed to move in a tight range of 0.3 per cent up or down from the previous day’s close — the same flexibility China has had, but chosen rarely to use, since it adopted a “managed float” policy in 1994.
The Japanese yen leapt 2 per cent on speculation as other Asian governments, afraid until now of giving China a competitive edge, would let their currencies rise on the yuan’s coat-tails.
Malaysia promptly did just that, scrapping the peg that had frozen the ringgit since 1998 and switching like China to a managed float. But Hong Kong, whose currency is also fixed against the dollar, said it had no intention of changing policy.
With China’s initial revaluation falling well short of the 10 per cent move that Washington had been seeking, dealers immediately started to wonder whether this would be the first in a series of gradual moves.
Frank Gong, chief economist for JP Morgan Chase in Hong Kong, said he expected the yuan to climb 10 per cent over the next year.—Reuters
