March 31, 2010 / 10:07 AM / 8 years ago

China ex-lawmaker proposes more flexible yuan

SHANGHAI, March 31 (Reuters) - China should reform its foreign exchange rate regime to let the yuan move more widely, Cheng Siwei, an influential former lawmaker, said on Wednesday.

Cheng suggested that the yuan be allowed to rise or fall by 3 percent and that the People’s Bank of China intervene whenever the limits of the band are reached. He did not specify whether the band would be against the dollar or a basket of currencies.

Under Cheng’s proposal, the yuan would be permitted to fluctuate indefinitely, as long as it stays within the prescribed range, instead of being bound by daily limits.

Currently, the yuan may move plus or minus 0.5 percent per day against the dollar, and 3.0 percent against other major currencies, from midpoint rates set each morning by the central bank.

Cheng, whose comments have moved markets in the past, said his suggestion would introduce greater currency flexibility while maintaining Beijing’s control over the exchange rate.

In July 2005, China scrapped the yuan’s dollar peg and adopted a “managed floating exchange rate system with reference to a basket of currencies”.

The authorities have not disclosed the composition of the basket or the weight of its constituent currencies.

“The current practice of ‘referring to a basket of currencies’ has given a very small role to market signals and the balance of supply and demand,” Cheng told a forum in Shanghai.

He said a rise or fall of less than 3 percent would constitute currency stability — China’s mantra even when it permitted the yuan to rise a further 19 percent against the dollar after its initial 2.1 percent revaluation in July 2005.

Since July 2008 China has repegged the yuan, also known as the renminbi (RMB), near 6.83 per dollar to help its exporters weather the global downturn.

“I read a report saying that a 2 percent appreciation in the yuan might kill China’s textile industry. That is certainly an exaggeration,” Cheng said.

The Chinese-language Caijing magazine on Tuesday quoted unidentified sources as saying Beijing was studying the option of dropping the yuan’s peg as early as next month.

UBS this week joined the ranks of banks expecting China to break the peg before long.

“Now that exports have rebounded strongly, we expect the RMB to be allowed to appreciate faster against the dollar in Q2 2010, most likely in the form of a gradual move accompanied by an increase in the daily trading band, and trade at 6.4-6.5 against the dollar by end year,” Tao Wang, a UBS economist in Beijing, said in a report.

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