China bowed to months of market and political pressure today by revaluing the yuan by 2.1% and abandoning the currency's decade-old peg against the dollar.
In a long-awaited move that it said would improve the running of the economy and give more play to market forces, the central bank said the yuan's value from now on would be linked to a basket of currencies of China's main trading partners.
Beijing had been under strong pressure from its trading partners, especially the US, to abandon the yuan's peg of 8.28 per dollar, which they said undervalued the currency and handed Chinese exporters an unfair advantage on world markets.
The new rate, initially, will be 8.11 yuan per dollar, well short of the 10% revaluation that Washington had been seeking to head off protectionist pressure in Congress.
The central bank said the yuan, also known as the renminbi (RMB), would be allowed to move in a tight range of 0.3% up or down from the previous day's close in a continuation of the 'managed float' policy in place 1994.
'The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation,' the central bank said in a statement in English on its web site.
'The RMB exchange rate will be more flexible based on market conditions with reference to a basket of currencies,' it said.
In theory, a managed float leaves open the possibility of further incremental revaluations. But in practice China has kept the yuan virtually fixed; since early 1998 it has traded in a wafer-thin range near 8.28 per dollar.
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 said the timing of a move would be a surprise and has since reacted testily to increasingly vocal calls for a shift, saying the question went to the heart of China's sovereignty.
Foreign pressure has been especially intense in the US, where many law-makers blamed their country's $162 billion 2004 trade deficit with China on an unfairly cheap yuan.
Senators were preparing a bill that would have slapped a 27.5% tax on Chinese imports if Beijing did not revalue but last month delayed a vote on the measure after US Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan said it would be counterproductive.
Greenspan said a yuan revaluation would have minimal impact on the US trade deficit but urged China to adopt a more flexible currency for its own sake.
European Central Bank chief Jean-Claude Trichet has welcomed the news that China had revalued its currency against the dollar, saying he hoped it would contribute to global financial stability.
'The decision by Chinese authorities is a welcome one,' Trichet declared.
'The international community had called for such a decision, considering that greater flexibility would lead to a better functioning of the global economy. I salute this decision and hope the establishment of a new regime of floating exchange rates will contribute to global financial stability', he added.
