June 20, 2010 / 2:31 AM / in 7 years

Chinese yuan under scrutiny before G20 meeting

<p>An clerk counts yuan banknotes at a bank in Hefei, Anhui province, June 20, 2010. REUTERS/Stringer</p>

BEIJING/WASHINGTON (Reuters) - Policymakers in the world’s major economies will closely monitor the Chinese yuan this week for signs it is actually moving after Beijing announced it would make its exchange rate more flexible.

The Group of 20 nations will meet in Canada next weekend to hash out a course for the future as the world gradually emerges from the worst financial crisis since the 1930s.

China announced on Saturday it would allow more flexibility for the yuan, also known as the renminbi or RMB, signalling it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.

But China’s central bank ruled out a one-off revaluation, saying there was no basis for any big appreciation. That confused the outlook for markets and prompted scepticism that China’s actions would match its words.

“This announcement was timed to appease global leaders as we move towards the Toronto G20 meetings next weekend,” said Sherry Cooper, chief economist at BMO Capital Markets.

POSITIVE MARKET REACTION

Analysts were expecting China’s revaluation from the current level of 6.83 yuan to the dollar to happen at a tepid pace.

<p>A 100 yuan banknote is placed beside a U.S. 100 dollar banknote in this illustrative photograph taken in Taipei June 20, 2010. REUTERS/Nicky Loh</p>

“The currency will move only very gradually. I expect only about 0.2 percent a month until the situation in Europe stabilizes,” said Andy Rothman, a strategist at CLSA in Shanghai.

Still, regional currencies could see some sharp short-term gyrations as investors try to figure out what to make of the policy shift. Already, the Australian dollar had jumped over 1 percent against the U.S. currency in early trade.

U.S. stock markets looked set for a stronger open as investors bet China’s incremental steps would be a positive for the global economy. S&P 500 futures rose over 1 percent while Treasury bond futures edged lower.

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China’s tempering of its initial statement on the yuan prompted criticism from U.S. Senator Charles Schumer, who has argued the currency peg gives Chinese firms an unfair advantage by making their goods cheaper abroad.

“Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off. It vindicates our initial scepticism,” said Schumer, a leading China critic among U.S. lawmakers. “We intend to move forward as quickly as possible with legislation.”

U.S. officials have not yet decided whether or not to name China a “currency manipulator” -- something that would lend support to any legislative effort to punish Chinese producers through tariffs and other trade barriers.

The European Central Bank and Jean-Claude Juncker, who heads the Eurogroup of euro zone finance ministers, welcomed China’s decision on the yuan.

“Given China’s important role in the global economy, we encourage the authorities to allow for greater flexibility of the RMB effective exchange rate as a means of promoting balanced growth in China and in the world economy,” they said.

Writing by Pedro Nicolaci da Costa, Editing by John O'Callaghan

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