US and IMF welcome move towards removing currency’s peg to US dollar.
The move was welcomed by Barack Obama, the US president, as a “constructive step that can help safeguard the recovery and contribute to a more balanced global economy”.
‘No major change’
But Chinese officials have said all along that any reforming of the yuan, also known as the renminbi (RMB) or “people’s money”, will be gradual.
And on Sunday the central bank said “there is at present no basis for major fluctuation or change in the renminbi exchange rate” in a lengthy commentary on its announcement a day earlier.
The statement appears to imply that China considers the current exchange rate to be roughly where it ought to be, and economists say they do not anticipate big swings in the rate.
|China halted the yuan’s rise in 2008 to help exporters weather the economic crisis [AFP]|
Song Seng Wun, a regional economist with CIMB Research in Singapore, told Al Jazeera that China’s announcement on Saturday was nothing new and it had only said it would allow its currency to appreciate, but did not say when and how – similar to comments it made last month.
If, however, exports continue in the next couple of months “to show resilience and growth despite what’s happening in Europe, despite uncertainty about the state of the US economy, then perhaps it will give the Chinese a bit more confidence, especially if Chinese inflation rates continue to climb”, he added.
China allowed the yuan to rise by about 20 per cent beginning in 2005, but halted that two years ago to help Chinese manufacturers weather the global economic crisis.
Since then, the yuan’s value has been pegged to the dollar at an exchange rate of roughly 6.83 to $1.
The government sets the rate each day before the start of trading and retains powerful tools to control its movement.
Although it mentioned few specific steps and set no targets on Saturday, the central bank’s announcement won praise from trading partners and the IMF.
Internal and external criticism
But there was also criticism, with some saying that with China’s economy growing at double-digit rates, boosted by $586bn in stimulus spending and record bank lending to finance construction projects, Beijing can afford to move faster.
“Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” Charles Schumer, a US senator from Obama’s Democratic party and a leading critic of China’s currency policy, said on Sunday.
He said he planned to move forward with a bill that would punish Beijing for its currency policies, saying: “It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America as a result of unfair trade policies.”
The announcement on exchange rate flexibility seemed critically timed, coming a week ahead of a G-20 summit at which Hu Jintao, China’s president, would likely face critics of his country’s currency policy.
But the announcement drew criticism at home, with some Chinese experts saying it was a cave-in to foreign pressure that would ultimately damage China’s crucial export sector.
Ye Tan, an economist writing on the website of the National Business Daily, a leading business newspaper, said the move would pile pressure on exporters already contending with a roughly 15 per cent appreciation of the renminbi against the euro, as well as rising labour costs.
“China’s exports are unstable and this is having a major impact on the actual economy,” Ye wrote. “Appreciation of the renminbi needs to wait until economic readjustment is certain and China’s domestic demand has truly expanded.”