Fri, Jul 22, 2005 page1

• China bows to pressure over yuan peg

  2 PERCENT SOLUTION For the first time in years, Beijing allowed its currency to appreciate after coming under intense fire from the US for its `dangerous' fiscal policy

  • AFP
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  China yesterday revalued its currency for the first time in about a decade, scrapping the peg to the dollar in favor of a basket of currencies.

  The currency is now valued at 8.11 yuan to the US dollar compared to the old rate of 8.2765 yuan, effectively a 2 percent revaluation.

  The move was effective from 7pm yesterday.

  "From today, the [yuan] rate against the US dollar will appreciate by 2 percent," said the Web site of China's central bank, the People's Bank of China (PBOC). "One US dollar will exchange for 8.11 yuan."

  Almost simultaneously, Malaysia scrapped the ringgit currency's peg to the dollar and said it would move to a managed float.

  The dollar sank to ¥110.38 immediately following the Chinese announcement. It had stood at ¥112.50 before the move.

  The PBOC also said it has scrapped the yuan peg to the US dollar and repegged the Chinese unit to a basket of trade-weighted currencies, but did not reveal what they were.

  Previously, the foreign exchange trade center said it could include the Hong Kong dollar, the yen, the pound, the Swiss franc, the Australian dollar, Canadian dollar and the euro.

  Non-US dollar currencies trading against the yuan will be allowed to trade within certain bands, the bank said without elaboration.

  "The [yuan] currency rate will not be pegged only to the US dollar any longer, but according to the actual situation of China's foreign trade development, it will be pegged to several major currencies in a currency basket to give these currencies relevant importance," the PBOC said.

  China's yuan has been pegged to the dollar at 8.28 since 1997.

  The last time the Chinese government revalued it was in 1994 when Beijing devalued the currency by over 50 percent, from 5.70 or so to 8.30, from whence it moved up to 8.28 by 1997 where the authorities have held it ever since.

  China has come under intense pressure from its trade partners, especially the US, to revalue the yuan in recent months.

  On Wednesday, US Federal Reserve chief Alan Greenspan warned that Beijing's policy of pegging the currency to the dollar could cause "very serious" problems for the giant Asian economy.

  This was largely because financial operations that China uses to support its currency require the central bank to accumulate "very large" amounts of US Treasury bonds, he said.

  US officials have long argued the yuan's fixed exchange rate against the dollar has left the Chinese currency significantly undervalued, lifting Chinese exports, giving them an unfair advantage, and inflating the US trade deficit.

  The trading band which allows the yuan to move 0.3 percent either side of the mid-point is unchanged, the central bank said.

  The PBOC said that the move is aimed at solving a host of problems that the 11-year peg to the dollar had been causing on the back of China's recent economic expansion.

  "The move is aimed at easing trade imbalances, boosting domestic demand and increasing Chinese companies' competitiveness," the PBOC said.

  "It will also help to increase the independence of monetary policy, improve the effectiveness of financial controls, help maintain the basic balance of imports and exports to improve trade conditions, stabilize prices and cut corporate costs."

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  Pundits say NT dollar is safe, for now
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