China hints at allowing yuan to appreciate

CHINA sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying this week it would consider major currencies, not just the dollar, in guiding the exchange rate.

In its third-quarter monetary policy report, the People’s Bank of China departed from well-worn language on keeping the yuan ‘basically stable at a reasonable and balanced level’. It hinted at a shift from an effective dollar peg that has been in place since the middle of last year.’Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism,’ the central bank said in a report.The comments, published days before a visit to Shanghai and Beijing by US President Barack Obama, set out the possibility of a return to exchange rate appreciation that began in 2005.However, analysts were quick to caution against expecting any sudden shift in the yuan’s actual value, given China’s penchant for carrying out any reforms gradually.’The central bank’s worries about capital flows, liquidity, and inflation signal growing pressure for yuan appreciation,’ said Ben Simpfendorfer, strategist with the Royal Bank of Scotland in Hong Kong.The bank’s report came just hours after data that showed China had firmly put the worst of the global financial crisis behind it. – Nampa-Reuters