China Moves On Currency Ahead of G20 Meeting, Stops Short of Revaluation

The yuan (RMB) surged today following the People's Bank of China's (PBOC's) announcement this weekend that it would greater flexibility in its currency's exchange rate.

On Saturday the PBOC announced that it would allow the yuan to appreciate, ending the unofficial two-year peg to the dollar that was fiercely criticized for giving China an unfair advantage in international markets. The move came just ahead of the Group of 20 (G20) meeting scheduled to take place this weekend in Toronto. Observers will be closely watching the yuan this week however, to make sure that the currency actually does move and that China's announcement of increased flexibility was not merely a hollow gesture.

The first indications today were positive, as the yuan rose by 0.45% to 6.7969 per dollar after the PBOC set the daily reference point for trading.

A stronger yuan is expected to benefit U.S. exporters by making them more competitive in the still-booming Chinese market. China's domestic economy also stands to benefit from greater currency flexibility, as noted in a statement by Managing Director of the International Monetary Fund (IMF), Dominique Strauss-Kahn. "The People's Bank of China announcement to increase exchange rate flexibility and return to the managed floating exchange rate regime in place prior to the global financial crisis is a very welcomed development," he said. "A stronger RMB is in line with findings of the G-20 Mutual Assessment Process, to be presented in Toronto next week, and will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer."

While China's announcement was welcome in markets across the globe, it is expected to do little to calm harshly critical American lawmakers, who were hoping for a full on revaluation of the currency. According to the PBOC, the Chinese government avoided such a move in the interest of stability. "The reform this time does not involve a one-off exchange rate revaluation," said a PBOC spokesperson. "The objective is to stabilize the RMB exchange rate basically around an adaptive and equilibrium level, and in the meantime, improve China´s Balance of Payments (BOP) situation, and achieve economic and financial stability."

Jacob Barron, NACM staff writer

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