June 20, 2010 in Nation/World

China to loosen currency exchange rate

Cara Anna Associated Press
 
At a glance

The yuan’s gradual appreciation against the U.S. dollar began in 2005 but was halted abruptly in 2008 as the global financial crisis took effect. Since then, the yuan has remained at roughly 6.83 to $1, although it is formally pegged to a basket of currencies that includes the U.S. dollar.

BEIJING – President Barack Obama welcomed China’s announcement Saturday that it will allow a more flexible exchange rate for its currency, saying it would help protect the economic recovery.

The announcement by China’s central bank suggested a possible break from the yuan’s two-year peg to the U.S. dollar – a source of friction between the two countries – but ruled out any large-scale appreciation.

The People’s Bank of China mentioned no specific policy changes, though markets will be watched closely Monday for the announcement’s effects. Chinese officials have said all along that reforms of the yuan, also known as the renminbi, or “people’s money,” will be gradual.

“It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility,” the central bank said in a statement posted on its website.

The announcement, timed just before President Hu Jintao’s trip to the G-20 summit in Toronto, follows warnings from Beijing earlier this week against making its currency a main focus of the meeting.

Beijing kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand. It faces pressure from the United States and other trading partners who contend the yuan is undervalued.

“China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Obama said in a statement.

U.S. Treasury Secretary Timothy Geithner called the move an “important step.”

“But the test will be how far and how fast they let the currency appreciate,” he said.

The announcement is unlikely to satisfy critics in Congress, who argue that an undervalued currency gives China’s exporters unfair advantages.

“Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules,” Sen. Charles Schumer, D-N.Y., said in a statement.

Chinese officials have warned that adjustment to the exchange rate is not other countries’ concern.

The director of the international department of the People’s Bank of China, Zhang Tao, told a news conference Friday that China will not discuss the yuan at the G-20 summit.

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