China will shift its focus to managing the yuan's exchange rate
against currencies of its biggest trading partners and not just the
dollar, allowing for a broader appreciation, former central bank
adviser Li Yang said.
China's currency has fallen six percent against the euro since a
peg to the US dollar was scrapped in 2005, prompting calls from
European officials including French President Nicholas Sarkozy to
allow faster gains.
There's a "shift in how the central bank will be watching the
rate and the focus of its policy target," Li, head of financial
research at the Chinese Academy of Social Sciences in Beijing, said
last Friday. The central bank will focus on a trade-weighted
"effective" exchange rate, he said, according to Bloomberg
News.
Gains in the yuan against more currencies may help China slow
growth in its trade surplus, which has flooded the economy with
cash and driven inflation to an 11-year high. Gross domestic
product grew 11.4 percent in 2007 from a year earlier, the fastest
pace in 13 years, driven by exports and investment.
"Currency strength represents the pre-eminent monetary policy
tool for the Chinese authorities," Dwyfor Evans, a strategist with
State Street Global Markets in Hong Kong wrote in a research note
yesterday.
"Investors should brace for rising yuan volatility amid a more
pronounced role for other yuan cross-rates."
The yuan fell as much as 0.6 percent against the dollar on the
first day of trading after a week-long holiday on February 13,
tracking declines in the euro and the yen.
The currency rebounded as the China Securities Journal cited
unnamed experts last Friday saying the central bank's focus will
shift to the effective exchange rate.
The currency rose 0.28 percent to 7.1623 per dollar at 5:30pm in
Shanghai yesterday, the highest since the end of the dollar peg,
according to the China Foreign Exchange Trade System.
Since ending the peg, the People's Bank of China managed it with
reference to a basket of currencies including the euro and the
Japanese yen.
(Shanghai Daily February 19, 2008)
