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RMB reform restarts, to aid China and world

06-21-2010 10:15 BJT Special Report: China to Reform RMB Exchange Rate Regime |

Analyzing Beijing's announcement over the weekend it will restart the reform of the RMB exchange rate regime, China observers say the move is "wise" which will accelerate the country to climb another step on the industrial ladder.

More than a dozen economists and international investment bankers welcomed Beijing's decision to un-peg the RMB with the U.S. dollar from today, but, they cautioned that China's regulators would try to prevent any big volatility in the exchange rate, which does not help China's and the global economy, and is likely to rein in the scope of the yearly rise of the RMB value against the U.S. dollar within 3-4 percent.

Economists believe an annual 3-4 percent rise of the RMB will be capable of stonewalling speculative "hot money" entering China, which will jeopardize the economy and increase the risks of inflation in the country.

Since the People's Bank of China (PBOC), the central bank, initiated the RMB rate reform in July 2005, China's currency has gained 21 percent against the U.S. dollar. But Beijing pegged the RMB to the greenback in late 2008 when the global financial crisis erupted.

Now fairly ensured the global economic recovery is on a solid footing and its exports had rebounded since April, Beijing finally decided to enhance the RMB exchange rate flexibility, to help squeeze out low-value labor-intensive production, and to sooth rising outside cries that the RMB must be revalued.

U.S. President Barack Obama said China's move is a "constructive step" while the International Monetary Fund director-general Dominique Strauss-Kahn described the move as a "very welcome development".

"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement.

The European Union said that "such a move will be beneficial for both the Chinese economy and the global economy," adding that the move would not only benefit China's own economy but also the economy of the world as a whole. EU even hailed the move as "providing an important contribution to the success" of the G20 Toronto summit, which are scheduled for late this week.

Beijing's decision was made in view of the economic situation and financial market developments at home and abroad, and the balance of payments situation in China, the PBOC spokesperson said in a statement.

The reform of the RMB exchange rate regime is to reflect market supply and demand "with reference to a basket of currencies", that including the U.S. dollar, the euro, the yen, the British pound, and other currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market, PBOC said.

The statement emphasized the RMB be pegged to a basket of currencies, adding that the US dollar should not be the only gauge for judging the RMB exchange rate level.

The central bank said on Sunday it will not conduct a one-off revaluation of the RMB exchange rate this time, as promised by Premier Wen Jiabao. On July 21, 2005, when China started the reform, it allowed a one-off RMB rise of 2 percent against the U.S. dollar.

U.S. Treasury Secretary Timothy Geithner also welcomed China's decision to further reform its exchange rate mechanism and expected further cooperation with his Chinese counterpart within G-20 to promote the economic recovery.

Editor:Xiong Qu |Source: People's Daily

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