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China's yuan move signals end to crisis-mode exchange rate policy
2010/06/22

China's announcement that it would allow more flexibility in its yuan exchange rate meant an end to the crisis-mode policy the government took to cushion the blow from the global financial crisis, experts interviewed by Xinhua said Monday, June 21.

The People's Bank of China, also known as the central bank, said Saturday that it decided to proceed even further with the reform of the Renminbi exchange rate to add flexibility to the RMB exchange rate.

The decision was made in view of the recent economic situation and financial market developments at home and abroad, as well as due to the balance of payments situation in China, the central bank said. However, it ruled out a one-off revaluation of the yuan as there was no basis for large changes in its value.

Experts noted it was the correct time for the exchange rate policy to return to its normal state, given the consolidated economic recovery, large decline in trade surplus and more balanced international payments.

Zhao Xijun, deputy dean of the School of Finance with the Renmin University of China, said the normalization of China's exchange rate policy would intensify China's economic connection to the global economy and help promote the country's economic restructuring and adjustments of its development mode.

China moved to a managed floating exchange rate regime in July 2005 which was based on market supply and demand and referencing a basket of currencies. The reform of the RMB exchange rate has made continuous progress since then, producing the anticipated results and playing a positive role.

The financial crisis which broke out in the United States in 2008 shook the global financial markets and dented investment confidence. To counter fallout from the economic turmoil, nations rolled out their crisis-mode measures.

Zhou Xiaochuan, governor of the central bank, said in March that the exchange rate policy China took amid the crisis was part of the government's stimulus packages, and would exit "sooner or later" along with other crisis-measures.

China's economy expanded at 11.9 percent year on year in the first quarter of this year and exports surged 48.5 percent in May, government data showed.

Zhao said China narrowed fluctuation of the RMB exchange rate to stabilize market sentiment and stimulate economic growth amid crisis, which was in the interests of China and contributed to the country's economic recovery.

During the worst of the global crisis, exchange rates of a number of sovereign currencies to the U.S. dollar depreciated by large margins while the yuan kept stable. Against these depreciating currencies, the value of the yuan has been rising.

"Undoubtedly, it improved the trade environment for these countries and helped them through hard times," Zhao said, noting the policy contributed significantly to the Asian and global recovery.

"Narrowing the fluctuation of the yuan's value was the best exchange rate policy China could take during the crisis period, which gave export businesses a stable expectation of the yuan's value and reduced costs caused by a volatile currency," said Xiang Songzuo, Deputy Director of the Center for International Monetary Research at Renmin University of China.

The central bank's move also intended to increase competitiveness of export businesses and accelerate economic restructuring.

Zhao said when the RMB exchange rate regime becomes more market-oriented, China's export businesses should take more responsibilities and become more self-reliant.

The central bank said Sunday that the management and adjustment of the yuan exchange rate would occur gradually, which was necessary to give export businesses time to adjust their business structures and create more jobs in the service sector.

Cao Honghui, senior researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said the further proceeding meant China would rely more on domestic demands for economic growth, which would push forward adjustments of the global economic structure.

The central parity of the Renminbi against the U.S. dollar remained at 6.8275 Monday, unchanged from the previous trading day, according to the China foreign Exchange Trading System.

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