China makes good on flexibility vow, yuan falls

SHANGHAI, (Reuters) – China appeared to engineer a  fall in the yuan yesterday to make clear that its newly  flexible currency was not a one-way bet to appreciate, as  markets reflected waning optimism over Beijing’s new policy.

Big Chinese state-owned banks kept the yuan in check a day  after its biggest rise since the currency was revalued in 2005  and the Foreign Ministry said change would be gradual,  indicating the yuan’s appreciation will be far slower than the  pace demanded by critics in the West.

The two-way movement in the yuan is not great by the  standard of freely floated currencies but is rare in China,  where until this week the central bank had squashed intraday  volatility via intervention on most trading days.

China started to relax its control over the yuan ahead of  this weekend’s G20 summit of world leaders in Canada, easing a  two-year dollar peg that was a lightning rod for critics who  say the currency is undervalued and gives Chinese exporters an  unfair trade advantage.

“China has backed up all the talk with action and President  Hu (Jintao) will arrive in Toronto later this week with  tangible evidence that China is serious about increasing the  flexibility of its exchange rate,” said Brian Jackson,  strategist with Royal Bank of Canada in Hong Kong.

“We still may see moves in either direction from day to day  but we think the trend in the weeks and months ahead will be  for the yuan to make limited but meaningful gains against the  dollar.”
A Reuters poll of 33 economists forecast the yuan would  rise to 6.67 per dollar by the end the year, an increase of 2.4  percent from late last week before China’s policy announcement  and similar to the appreciation implied by offshore  non-deliverable forwards.