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China takes first step to honour yuan pledge

China took the first step Tuesday towards honouring a vow to let its currency float more freely, as US complaints that Beijing is stealing an unfair trade edge intensify heading into a G20 summit.

world Updated: Jun 22, 2010 14:11 IST


China took the first step on Tuesday towards honouring a vow to let its currency float more freely, as US complaints that Beijing is stealing an unfair trade edge intensify heading into a G20 summit.

But analysts warned that China would still prevent any large appreciation in the yuan that might curb the ferocious growth of its export-led economy, despite US calls for a hefty revaluation.

The People's Bank of China set the central parity rate -- the centre point of the currency's official trading band -- at 6.7980 to the dollar, 0.43 percent stronger than Monday's rate of 6.8275.

The central bank vowed at the weekend to make the yuan more flexible but ruled out any sharp fluctuations in the currency or a one-off adjustment.

The move was widely seen as a bid to head off rancour at this weekend's Group of 20 summit in Canada, amid mounting accusations abroad that China's currency controls give its exporters an undeserved competitive advantage.

"China has backed up all the talk with action," said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.

"President Hu (Jintao) will arrive in Toronto later with tangible evidence that China is serious about increasing the flexibility of its exchange rate."

But in the coming months there would only be "limited" gains against the dollar, Jackson added. In early trading on Tuesday, the yuan strengthened to 6.7968 on China's main foreign exchange market before weakening to 6.8200 on domestic demand for the dollar, Dow Jones Newswires said.

Traders said several Chinese banks were buying the greenback, amid speculation the central bank could be encouraging dollar purchases to reinforce the perception that a more flexible system cuts both ways.

"We saw buying from Chinese banks, mainly mid-sized ones," said a Shanghai-based forex trader.

The 6.7968 level was the yuan's strongest since policymakers unpegged the currency from the dollar in mid-2005 and moved to a managed floating exchange rate.

But Tuesday's level was still within Beijing's tight trading band and analysts said China's pledge did not presage a major revaluation.

The new trading band signalled that the government was making good on its promise for greater flexibility, said Mitul Kotecha, head of global forex strategy at Credit Agricole in Hong Kong.

"It was a further reflection of the reform of the yuan, the change and the depegging announced at the weekend," said Kotecha.

"We think we are going to see some further appreciation, but we are not looking for any aggressive move by the end of this year."

Policymakers revalued the yuan in July 2005 before reimposing a de facto peg at about 6.8 to the dollar three years later during the financial crisis to protect exporters, which have been the backbone of China's economic boom.

Critics, not least in the US Congress, say that has left the yuan undervalued by as much as 40 percent and has cost US jobs.

Prior to making its weekend promise of reform, Beijing had insisted that the currency's rate was not up for discussion at the G20, when presidents Hu Jintao and Barack Obama will meet other world leaders.

The currency issue has been a constant strain on US-China ties, with members of Congress -- facing mid-term elections in November -- threatening trade sanctions on China and pushing for action at the G20.

Senior Democratic Senator Charles Schumer on Sunday expressed disappointment at China's rejection of big fluctuations in the yuan and said US lawmakers would press ahead with plans to introduce retaliatory legislation.

First Published: Jun 22, 2010 14:10 IST