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G20 wary on China move to de-peg yuan

GLOBAL politicians at the weekend cautiously welcomed China’s move to de-peg its currency from the US dollar for the first time in almost two years, bowing to international pressure a week before the G20 meets in Toronto.

US President Barack Obama labelled the new policy a “constructive step”, although the response from Washington was muted by the People’s Bank of China’s (PBoC) refusal to authorise a single large-scale revaluation of the yuan.

Instead, Chinese policymakers said it would make the exchange rate more flexible by determining the yuan’s value on a daily basis with reference to a basket of currencies, allowing it to appreciate slowly and gradually against the dollar. The currency’s existing 0.5 per cent daily trading band will remain unchanged.

Analysts warned that the move, although a welcome development, would be seen by some as a half-baked attempt by Beijing to placate global policymakers ahead of the G20 meeting this week.

The PBoC said the renminbi would, despite its increased flexibility, remain “basically stable at an adaptive and equilibrium level” going forward – a statement which Societe Generale analyst Glenn Maguire said carried the connotation that “China does not believe the yuan is significantly undervalued and that it is trading close to what Beijing would assess as its fair value”.

However, Maguire said even a gentle appreciation of the yuan would prove a “powerful tonic” for growth both in Asia and the rest of the world.

Although Chinese exporters, who have benefited from strong demand in the past few years due to an artificially weak domestic currency, will now find it more difficult to sell abroad, other sectors of the country’s economy stand to benefit from the move. Chinese banks will see their yuan-denominated assets appreciate in line with the rising currency, while shares in the country’s top airlines are also expected to rise in the short term, since their main operating costs are aircraft purchases overseas.

Q&A: CHINA’S YUAN POLICY
Q. WHAT HAS BEEN ANNOUNCED BY CHINESE OFFICALS?

A. The Chinese central bank said on Saturday it would gradually make the yuan’s exchange rate more flexible from Monday. The yuan, also known as the renminbi, was pegged to the dollar at 6.83 yuan in July 2008, ending three years of a managed floating exchange rate.

Q. WHAT DOES THIS MEAN FOR ITS FOREIGN EXCHANGE POLICY?

A. There will be no one-off move; instead, there will be a gradual increase in dollar-yuan daily fixings to around 10-20 basis points from 1-2 points.

Q. WHY WAS CHINA UNDER PRESSURE TO REVALUE THE YUAN?

A. Beijing had defended the peg in the face of growing US and international presssure. By keeping its currency cheap against the dollar, China has made its imports appear more attractive. This has resulted in a massive trade surplus in China.

A rebalancing of the yuan has been deemed necessary to prevent a further build up of global imbalances. If the US is still assumed to be both the consumer and importer of last resort – and thus goes back to running large current account deficits – then this would risk a repeat of recent history.