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June 21, 2010    

Markets expect China to relax yuan

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by Kay Murchie
Markets expect China to relax yuan

Stock markets in Asia have gained today after comments by China’s central bank about its currency policy this weekend.

Policymakers had pledged to make the yuan more flexible but then just 24 hours later the central bank’s website said: “There is at present no basis for major fluctuation or change in the [yuan] exchange rate”.

However, its pledge “strengthen the flexibility” of the yuan exchange rate was seen by some analysts that Beijing was ready to relax the dollar peg and allow the currency to rise.

The Chinese central bank currently sets a target exchange rate against the US dollar each day.

However, growing speculation over the change in policy saw markets push up the exchange rate by 0.4% above the target, - the highest level in 16 years.

Currencies saw gains with the Korean won, the Malaysian ringgit and the Japanese yen all rising by 1-2% on the news.

China has been under pressure to allow its currency to find its own level, in order to ease inflation, prevent the economy from overheating, as well as encouraging domestic consumption in China.

In particular, the US has expressed dissatisfaction that China is keeping the value of the yuan low to help its exporters at the expense of overseas competitors.

Last week, the World Bank joined other commentators by saying that the yuan, which is also referred to as the renminbi, should be strengthened against other international currencies.

US legislators and trade groups have previously said the yuan is kept up to 40% below what its value should be against the US dollar.

However, China has previously said that keeping the yuan stable is “an important contribution” to global recovery.

The Chinese currency pegged the US dollar until 2005 when it was allowed to rise in value by about one fifth.

The peg was reinstated in July 2008 when the global financial crisis took hold, amid US concerns of the impact on trade.

“A stronger yuan would not only help prevent trade tensions from developing later in the year, but, more importantly, would help to keep China’s recovery on a sustainable path and to rebalance its economy,” according to Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong.

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