China’s Central Bank announced recently in a statement posted on its website that “it is desirable to proceed further with reform of the RMB exchange rate regime and to increase the RMB exchange rate flexibility.” It added that “continued emphasis would be placed on reflecting market supply and demand with reference to a basket of currencies”. The statement also suggested that there is no basis for “large-scale appreciation.” The renminbi’s 0.5 percent daily trading band will remain unaltered.
The announcement, timed just before President Hu Jintao’s trip to the G-20 summit in Toronto, Canada, follows warnings from Beijing earlier last week against making its currency policies a main focus of the meeting. “China has to offer something ahead of the G-20,” Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kang said, “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.”
The announcement signals an end to the currency’s 23-month-old peg to the dollar and suggests managing the currency more with reference to a basket as the economy recovers strongly and inflationary pressure continues to build.
This is a very positive development in terms of financial and economic reform in China, and a vote of confidence in the Chinese economy. And indeed, this is a vote of confidence in the global economic recovery.
The move will also serve to assuage some of the protectionist sentiment that had been rising in recent weeks, including the threat of tariffs by prominent members of the US congress.
Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005. Central bank dollar buying has left the nation with $2.4 trillion in currency reserves, the world’s largest holding.
Major domestic China focused companies, including Beijing-based com-puter maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said that appreciation of the renminbi would enable them to gain from lower import costs and an increase in consumer purchasing power.
Contemporaneous with the exchange rate announcement, the Nat-ional Bureau of Statistics announced that China’s retail sales in May rose 18.7% year on year to RMB 1.25 trillion ($183 billion).
Although some observers may point out that any appreciation in the…
