BEIJING/WASHINGTON (Reuters) – China said yesterday 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.
US 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. 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.
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. China, the largest holder of US sovereign debt, may reduce its demand for those securities in the future. China buys US 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 US consumers while making US 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.
US 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 US 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.
US 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 programmes.
But he must balance quiet diplomacy against an urgent domestic political need to be seen fighting China for US jobs before congressional elections in November. US businesses must also tread softly with China. Caterpillar Inc, which sells billions of dollars of earthmoving equipment and other products to China each year, said it was heartened by the decision.
