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Copyright 2005 The Financial Times Limited
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: RENMINBI REVALUATION; Pg. 11
LENGTH: 629 words
HEADLINE: Move raises key questions on central bank's future policy THE NEW REGIME
BYLINE: By CHRIS GILES
BODY:
China's new exchange rate regime represents a clear departure from its previous fixed peg to the US dollar.
In future the People's Bank of China will set the value of the renminbi against a basket of currencies rather than the dollar; the value of the renminbi was immediately revalued by 2.1 per cent; and the central bank will adjust the exchange rate peg in future as a "managed float" with changes "when necessary according to market developments as well as the economic and financial situation".
As such the announcement was a move towards a more flexible exchange rate regime, which could include regular, even daily, fluctuations in the renminbi's price.
Three big outstanding questions remain, however: what the composition of the basket of currencies will be; how regularly the bank will adjust the value of the currency in future; and what would prompt decisions to change parity levels.
Since the Chinese authorities also called their old pegged currency regime a "managed float", a wide variety of outcomes would be consistent with the language used by China's central bank yesterday.
For the past decade the bank has intervened in currency markets to keep the currency at Rmb8.28 for every US dollar.
The website of the bank described its monetary policy objective as simply "to maintain the stability of the renminbi and thereby promote economic growth".
China intervened in the currency markets to maintain the 8.28 peg.
In the past two years its purchases of US dollars were huge, roughly Dollars 200bn (Euros 154bn, Pounds 117bn) a year, as China's trade surplus grew and overseas investment surged.
The rate of increase in China's foreign exchange reserves was widely seen as unsustainable.
Under the new system the bank said the currency's value would initially be set at Rmb8.11 to the dollar.
The bank added that it would continue to allow the currency to float within a band of 0.3 per cent around the central parity, although it has sought to avoid such fluctuations in the past.
In addition, it added that the currency "will no longer be pegged to the US dollar" but would instead be a "managed floating exchange rate regime" based on "a basket of currencies".
The bank did not give any indication of the composition of that basket, but the move will mean that the renminbi's value against the dollar is bound to fluctuate periodically in line with movements in the dollar exchange rate with other currencies.
If the euro appreciates substantially against the dollar, for example, the bank will reflect that change with a corresponding revaluation of the renminbi against the dollar.
This would avoid the Chinese currency's value falling against the whole basket of currencies.
The extent of the move against the dollar would depend on the weight of the euro in the basket of currencies. Those weights were not revealed by the bank yesterday.
The resulting system could operate in a similar way to a fixed exchange rate regime but with the renminbi's parity pegged to the basket rather than the dollar alone.
But there were indications from the bank that the move could result in more regular currency fluctuations and a more flexible regime.
The bank's statement said it would attempt to maintain the "renminbi exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability".
With China's trade surplus high and rising, this reference to equilibrium indicates that yesterday's revaluation is the first of perhaps many upward adjustments to the renminbi's value.
Ambiguous as the statement is, the door has been left open to continue revaluing the renminbi on a regular basis.
It is bound to see speculative money flows continuing to surge into China.
LOAD-DATE: July 21, 2005
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: RENMINBI REVALUATION; Pg. 11
LENGTH: 629 words
HEADLINE: Move raises key questions on central bank's future policy THE NEW REGIME
BYLINE: By CHRIS GILES
BODY:
China's new exchange rate regime represents a clear departure from its previous fixed peg to the US dollar.
In future the People's Bank of China will set the value of the renminbi against a basket of currencies rather than the dollar; the value of the renminbi was immediately revalued by 2.1 per cent; and the central bank will adjust the exchange rate peg in future as a "managed float" with changes "when necessary according to market developments as well as the economic and financial situation".
As such the announcement was a move towards a more flexible exchange rate regime, which could include regular, even daily, fluctuations in the renminbi's price.
Three big outstanding questions remain, however: what the composition of the basket of currencies will be; how regularly the bank will adjust the value of the currency in future; and what would prompt decisions to change parity levels.
Since the Chinese authorities also called their old pegged currency regime a "managed float", a wide variety of outcomes would be consistent with the language used by China's central bank yesterday.
For the past decade the bank has intervened in currency markets to keep the currency at Rmb8.28 for every US dollar.
The website of the bank described its monetary policy objective as simply "to maintain the stability of the renminbi and thereby promote economic growth".
China intervened in the currency markets to maintain the 8.28 peg.
In the past two years its purchases of US dollars were huge, roughly Dollars 200bn (Euros 154bn, Pounds 117bn) a year, as China's trade surplus grew and overseas investment surged.
The rate of increase in China's foreign exchange reserves was widely seen as unsustainable.
Under the new system the bank said the currency's value would initially be set at Rmb8.11 to the dollar.
The bank added that it would continue to allow the currency to float within a band of 0.3 per cent around the central parity, although it has sought to avoid such fluctuations in the past.
In addition, it added that the currency "will no longer be pegged to the US dollar" but would instead be a "managed floating exchange rate regime" based on "a basket of currencies".
The bank did not give any indication of the composition of that basket, but the move will mean that the renminbi's value against the dollar is bound to fluctuate periodically in line with movements in the dollar exchange rate with other currencies.
If the euro appreciates substantially against the dollar, for example, the bank will reflect that change with a corresponding revaluation of the renminbi against the dollar.
This would avoid the Chinese currency's value falling against the whole basket of currencies.
The extent of the move against the dollar would depend on the weight of the euro in the basket of currencies. Those weights were not revealed by the bank yesterday.
The resulting system could operate in a similar way to a fixed exchange rate regime but with the renminbi's parity pegged to the basket rather than the dollar alone.
But there were indications from the bank that the move could result in more regular currency fluctuations and a more flexible regime.
The bank's statement said it would attempt to maintain the "renminbi exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability".
With China's trade surplus high and rising, this reference to equilibrium indicates that yesterday's revaluation is the first of perhaps many upward adjustments to the renminbi's value.
Ambiguous as the statement is, the door has been left open to continue revaluing the renminbi on a regular basis.
It is bound to see speculative money flows continuing to surge into China.
LOAD-DATE: July 21, 2005
posted by Eastlaw at Saturday, July 23, 2005
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