China considers pegging yuan to 10-currency basket

GREENBACK BEGONE: Without fanfare, China may be moving to unpeg the yuan from the US dollar and peg it instead to its 10 largest trading partners' currencies

AFP , BEIJING

Tue, Dec 23, 2003 - Page 11

China's central bank is quietly moving ahead with a plan to peg the yuan to a basket of 10 currencies, instead of the US dollar alone, the state press reported Monday.

The prospective 10 currencies would represent the bulk of China's trade with the rest of the world as well as its main sources of investment, the China Business Post reported, citing sources with the People's Bank of China.

At a later phase China could eventually allow a "managed float" that would permit the currency to move within a set range.

The report gave no timetable for implementation of either phase and stressed that the potential policy change was still being studied.

It comes as a group of US government experts prepares to visit Beijing next month to discuss possible changes to the existing foreign exchange rate structure.

China has effectively pegged the yuan at about 8.3 yuan to US$1 since 1994 but it has come under increasing pressure, particularly from the US, to revalue.

China has publicly maintained that the problem is structural, reflecting its much lower labor costs, but has signalled a certain willingness to investigate a more flexible currency structure.

China has been studying a peg of the yuan to a basket of currencies since the beginning of the year in order to allow the exchange rate to appropriately reflect the country's trade performance and avoid short-term foreign exchange rate fluctuations, the China Business Post said.

According to local statistics, China's major trade partners in 2002 were the US, Japan, Hong Kong, and the Euro zone countries, followed by Indonesia, Malaysia, Singapore, Thailand, South Korea and Taiwan.