News
China Reintroduces Currency Flexibility
Monday, June 21, 2010
In July 2005, Chinese officials decided to allow some flexibility in the exchange value of the renminbi, and it subsequently strengthened 21 percent against the U.S. dollar over the next three years. However, as uncertainty about global economic prospects spiked in the summer of 2008, the appreciation of the yuan versus the dollar came to a grinding halt and the exchange rate remained essentially fixed over the next two years. Over this past weekend, Chinese officials reverted to their 2005-2008 policy when they announced their intention to “proceed further with reform of the renminbi exchange rate regime and to enhance the renminbi exchange rate flexibility.” Overnight, the yuan strengthened 0.4 percent vis-à-vis the greenback, its biggest daily move since the one-step revaluation of 2 percent in July 2005.
Unlike the euro/dollar exchange rate, which is set entirely by market forces, the exchange value of the renminbi, even under the current policy, is heavily managed by the central bank. During the 2005-2008 period, the policy of the People’s Bank of China (PBoC) was to manage the exchange value of the renminbi versus a basket of currencies and to constrain daily fluctuations in the yuan/dollar exchange rate to 0.5 percent. In reality, the exchange rate moved much less on a daily basis. This policy has now been re-introduced, which should allow some modest appreciation of the yuan in the months ahead.
Contact Name: Rob Kiener
Contact Email: rkiener@pmpa.org
Contact Phone: (440) 526-0300
Related Files:
Wells Fargo China Currency Report
