China unshackles yuan and investors rejoice


China tries to deflect criticism that its currency is undervalued


China’s currency move to even playing field?

U.S. and Asian markets are on the rise after China altered how it values its currency. Franklin Lavin, who served as White House political director under President Reagan, discusses how the move will impact American businesses.

Yuan jumps to 21-month high

China's central bank signaling an end to a 2-year peg that kept the yuan at lower levels, with Boris Schlossberg, GFT Forex researcher.

China's yuan surged on Monday the most since its revaluation in 2005, sending a clear signal ahead of this weekend's G20 summit that Beijing is sticking to its word of allowing greater currency flexibility.

The central bank has maintained the peg since the middle of 2008, a controversial policy aimed at steadying the world's fastest-growing major economy during the global economic downturn.

But the central bank stepped aside on Monday to back up its surprise weekend announcement that it would allow greater flexibility for the yuan, buying some time against Western critics who argue the currency is undervalued and gives China an unfair advantage in world trade.

Story continues below 

After the People's Bank of China (PBOC), the central bank, set the daily reference point for trading, the yuan rose by 0.45 percent to as high as 6.7969 per dollar -- the biggest intraday rise since China revalued the currency in 2005.

Still, while the yuan's rise may signal China's intention to let financial markets play a bigger role, the central bank showed it had ultimate control of the market by setting the reference rate for the day's trading at the same level as Friday's fixing.

"If they want to show that the exchange rate is more market driven, then why not allow the market to drive the change rather than drive a change through the fixing?" said Stephen Green, head of China research at Standard Chartered in Shanghai.

"Some people suspect the PBOC guides the fixing, so if you allow the market to determine the rate and intra-day trading, then that's a more flexible exchange rate than guiding the fixing," he said.

The yuan is permitted to rise or fall 0.5 percent from the daily reference rate, but it has rarely tested that band.

China's economic strength gave policymakers confidence to end the peg, but they remain worried demand for China's exports is not on a solid footing given risks like Europe's debt woes.

The central bank ruled out a one-off revaluation of the currency and suggested the yuan's value was close to fair value.

Still, analysts said China needs to show the G20, whose leaders meet June 26-27 in Canada to discuss issues including global trade imbalances, that it is serious in its commitment to make the yuan more flexible.


Its announcement at the weekend that it would give the currency greater flexibility was welcomed globally, albeit with some caution as policymakers waited to see what the words would mean in practice.

Markets, for their part, were not so circumspect.

Asian currencies and stocks rose and U.S. Treasuries fell on expectations that China's promise to give the currency new room to move would ease political tensions with the West and encourage investors to snap up riskier assets.

Its announcement at the weekend that it would give the currency greater flexibility was welcomed globally, albeit with some caution as policymakers waited to see what the words would mean in practice.

Markets, for their part, were not so circumspect.

Asian currencies and stocks rose and U.S. Treasuries fell on expectations that China's promise to give the currency new room to move would ease political tensions with the West and encourage investors to snap up riskier assets.

Story continues below ↓


Commodities and oil also surged, as a stronger currency would give the world's third-biggest economy more purchasing power to buy foreign goods, which would be positive for world trade, especially for commodity exporters such as Australia, Brazil, Canada and New Zealand.

Crude prices rose 2 percent to the highest since early may, while copper and zinc traded in Shanghai both rose by their daily limits.

Many economists see the currency strengthening further in coming days, albeit at a very modest pace, meaning some of Monday's early exuberance could turn out to be overdone.

A Reuters poll of 33 economists showed they expected the yuan to end the year at 6.67 per dollar, a rise of 2.4 percent from late last week before China's policy announcement and similar to the appreciation implied by offshore non-deliverable forwards.

The central bank may also be keen in the months ahead to increase the volatility of the yuan to discourage the hot-money flows that accompanied its steady appreciation from 2005 to 2008.

Economists say a higher yuan could help temper inflation in China by pushing down import prices, which in turn could reduce the need for Beijing to tighten monetary policy. Markets had been worried that China could over-tighten and suffer a hard landing.

Comments