* China to gradually make yuan more flexible
* But Beijing says no basis for big changes
* Likely to have small movements through daily rate
* Obama says China's move 'a constructive step'
* Move reduces risk of confrontation at G20 June 26-27
(Adds more background)
By Michael Wei and Alister Bull
BEIJING/WASHINGTON, June 19 China said on
Saturday it would gradually make the yuan more flexible, in a
gesture that may deflect foreign criticism at next week's G20
summit but will not quickly yield a big move by its currency.
U.S. President Barack Obama, who prodded China over the
yuan in a letter released on Friday, welcomed the news in an
indication the danger of a market-roiling confrontation at the
Group of 20 meeting in Canada had eased.
"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. [ID:nN19274114]
Other Western leaders and the International Monetary Fund
also voiced encouragement that an important strategic ally was
making a concession which improves the chances of success at
the June 26-27 summit. [ID:nLDE65I0CZ] [ID:nN19148339]
But the announcement by China's central bank, which
strongly suggested it was ready to break the currency's
23-month-old dollar peg, was conditioned by an explicit warning
ruling out a one-off revaluation or major yuan appreciation.
"The basis for large-scale appreciation of the RMB exchange
rate does not exist," the People's Bank of China said.
The yuan is also known as the renminbi, or RMB.
For full coverage [ID:nSGE65I02M]
Factbox on China's currency system [ID:nSGE65I02Q]
Text of China central bank statement [ID:nTOE65I017]
Analysts were broadly positive about the news but cautioned
that China, the largest holder of U.S. sovereign debt, may
reduce its demand for those securities in the future. China
buys U.S. bonds to manage the yuan's peg to the dollar, and
greater currency flexibility may dilute that necessity.
The peg, which Beijing defended as a source of stability
during the recent global financial crisis, has come under
intense criticism from abroad as China's export juggernaut
roared back to life.
Much of the rest of the global economy remains sluggish and
beset by unemployment in the wake of the financial crisis, and
China's policy is seen as stealing jobs from foreign markets.
In particular, by keeping the yuan artificially cheap
against the dollar, China makes its imports more attractive for
U.S. consumers while making U.S. exports to China more costly.
That has contributed to a massive surplus in China's trade
account with the United States, sparking protests that the
policy is at the direct expense of American jobs.
U.S. patience with Beijing over the yuan has worn thin and
lawmakers threaten to penalize it for a strategy they say is
unfair and breaks the rules.
Democratic U.S. Senator Charles Schumer, a leading critic,
said China's statement was too vague and pledged to press ahead
with legal action to raise trade barriers. [ID:nN19183144]
U.S. Treasury Secretary Timothy Geithner, who has delayed
publication of a potentially embarrassing report that could
cite China as a currency manipulator, also stressed that
China's actions would speak louder than words.
"This is an important step but the test is how far and how
fast they let the currency appreciate," he said.
The currency report, due on April 15, was put on the
back-burner until after the G20 to give China time to act.
Obama needs China's help on a range of other delicate
issues, including sanctions against Iran and North Korea for
their nuclear programs.
But he must balance quiet diplomacy against an urgent
domestic political need to be seen fighting China for U.S. jobs
before congressional elections in November.
U.S. businesses must also tread softly with China.
Caterpillar Inc (CAT.N), which sells billions of dollars of
earthmoving equipment and other products to China each year,
said it was heartened by the decision. [ID:nN19167249]
G20 leaders have promised to tackle so-called global macro
imbalances, posed by massive trade surpluses and deficits.
Those are blamed for fostering a bubble in the U.S. housing
market in 2008, and contributing to the recent European
sovereign debt crisis. Economists say such imbalances are not
sustainable in the long term, and warn they may trigger another
damaging global financial crisis if investors take fright.
Beijing's recent insistence that the summit was the wrong
place to talk about yuan flexibility could have overshadowed
the meeting and damaged trust. China reduced that risk with
"This is an important move as it signals recognition by
Chinese officials that a more flexible exchange rate is in
China's own interest and also acknowledges its responsibility
to the international community," said Eswar Prasad, a former
head of the International Monetary Fund's China division.
China has long said it would not bow to international
pressure over its currency, and the central bank went out of
its way to dampen expectations for any big yuan rise.
"We believe this is a positive gesture, suggesting the yuan
will soon resume its appreciation against the dollar," said
Goldman Sachs economists Yu Song and Helen Qiao.
The news could also ease fears of a trade dispute between
the United States and China at a delicate time for the world
economy and may propel world stocks markets higher on Monday.
It was clear that China intended its announcement --
published in English at around the same time as Chinese, a
departure from usual practice -- to mark the end of the yuan's
de facto peg to the dollar. That had been defended as a special
protection policy during the global financial crisis.
"The global economy is gradually recovering. The recovery
and upturn of the Chinese economy has become more solid with
enhanced economic stability," the Chinese central bank said in
a statement on its website.
"It is desirable to proceed further with reform of RMB
exchange rate regime and increase the RMB exchange rate
flexibility," it said.
China has held the yuan at roughly 6.83 to the dollar since
July 2008 in an attempt to insulate the fastest-growing major
economy from the turmoil sparked by the U.S. credit crunch.
(Additional reporting by Phil Smith, Lu Jianxin and Zhou Xin,
David Lawder, Andy Sullivan, Emily Kaiser and Lesley Wroughton
in Washington, James Kelleher in Chicago; Writing by Simon
Rabinovitch and Alister Bull; Editing by Neil Fullick, Kristin
Roberts and Peter Cooney)