The Telegraph
Since 1st March, 1999
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Chinese currency wall cracks

Beijing, July 21 (Reuters): China finally bowed to two years of political and market pressure on Thursday by revaluing the yuan by 2.1 percent and leaving the door open to further rises by abandoning the currency’s decade-old peg against the dollar.

Analysts described the long-awaited move as modest and said it would have a limited economic impact. But they said the shift, ahead of a US visit in September by President Hu Jintao, made good political sense and potentially marked a critical step by China’s policy makers towards giving more play to market forces.

“The most important thing is the change, not how much it changed,” said Li Yang, a senior economist with the Chinese Academy of Social Sciences in Beijing.

US treasury secretary John Snow applauded the shift as a significant contribution to global financial stability, while a senator who has been a leading critic of Beijing’s currency policies called it a welcome “first baby step”.

“If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome,” senator Charles Schumer, a New York Democrat, said in a statement.

After keeping the yuan virtually fixed near 8.28 per dollar since 1996, China said as of 7 p.m. (1100 GMT) it was adjusting the currency's value to 8.11 and tying it to a basket of currencies of China's main trading partners.

The central bank said the yuan would be allowed to move in a tight range of 0.3 per cent up or down from the previous day's close ' the same flexibility China has had, but chosen rarely to use, since it adopted a “managed float” policy in 1994.

The Japanese yen leapt 2 per cent on speculation other Asian governments, afraid until now of giving China a competitive edge, would let their currencies rise on the yuan’s coat-tails.

Malaysia promptly did just that, scrapping the peg that had frozen the ringgit since 1998 and switching like China to a managed float. But Hong Kong, whose currency is also fixed against the dollar, said it had no intention of changing policy.

More to come'

With China's initial revaluation falling well short of the 10 per cent move that Washington had been seeking, dealers immediately started to wonder whether this would be the first in a series of gradual moves.

“It’s just a gesture. The question now is whether there will be continuing speculation that China may revalue even more,” said Ben Kwong, an analyst from KGI Asia in Hong Kong. Frank Gong, chief economist for JP Morgan Chase in Hong Kong, said he expected the yuan to climb 10 per cent over the next year.

But a spokesman for the central bank said big movements in the yuan would harm the economy, which has become a major engine of world growth since China threw its markets wide open by joining the World Trade Organisation in 2001. China had long insisted that it would adopt a more flexible exchange rate system, but not until it was ready.

In March, Premier Wen Jiabao impishly said the timing of a move would be a surprise and has since reacted testily to calls for a shift, saying the question touched on China’s sovereignty.

Foreign pressure has been especially intense in the United States, where many law-makers blamed their country’s $162 billion 2004 trade deficit with China on an artificially cheap yuan, which they said handed Chinese exporters an unfair advantage.

Schumer is co-author of a bill that would have slapped a 27.5 per cent tax on Chinese imports if Beijing did not revalue.

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