China Signals a Gradual Rise in Value of Its Currency

The People’s Bank of China has announced plans to increase the RMB exchange rate flexibility. From the New York Times:

China’s central bank announced on Saturday evening that it would allow greater flexibility in the value of the country’s currency, in the clearest sign yet that China will allow the renminbi to appreciate gradually against the dollar.

The People’s Bank of China said that the Chinese economy was strengthening after the global financial crisis and that it was “desirable to proceed further with reform” of the currency, known as the renminbi or yuan. The announcement comes a week before world leaders gather in Canada for the Group of 20 and Group of 8 summit meetings. A growing number of countries have been calling for China to let the renminbi appreciate, including not just the United States and European nations, but India, Brazil and Singapore in recent weeks.

The statement on Saturday was vague and did not provide any detail on how much the currency might rise, or when. But in an indication that the central bank was trying to send a signal to financial markets, it took the rare step of issuing statements almost simultaneously in English and Chinese.

Global political leaders have praised the move. From the Wall Street Journal:

“We welcome China’s decision to increase the flexibility of its exchange rate,” U.S. Treasury Secretary Timothy Geithner said in a statement issued shortly after the Chinese central bank’s announcement. “Vigorous implementation would make a positive contribution to strong and balanced global growth.”

Japanese Finance Minister Yoshihiko Noda offered a similar reaction. “I hope this will contribute to stability and balanced growth in the Chinese, Asian and therefore global economies,” Mr. Noda said in a prepared statement released by the finance ministry.

Meanwhile, the European Union’s executive arm said the decision would generate positive effects for the countries that use the euro. “The decision will help achieve more sustainable growth in the global economy, contribute to reduce external imbalances and strengthen the stability of the international monetary and financial system,” the European Commission said in a prepared statement.

Read the official statement from the People’s Bank of China, titled “Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility” (click here for the Chinese version):

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.

Read more about China’s currency revaluation from CDT.



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