China gives way to calls for currency revaluation

China has succumbed to years of concerted political pressure and agreed to abandon its decade-old currency peg with the dollar.

The government said it would allow the yuan to rise by just over 2 per cent before moving to a floating exchange rate system based on a basket of currencies. This was less than the expected 5 per cent but was seen as the first of a series of moves to integrate China more deeply into the global financial system.

The decision was welcomed by politicians in the US, Japan and Europe as well as the International Monetary Fund and the Organisation for Economic Co-operation and Development.

Economists said this was positive news for both the Chinese and global economies as it would reduce the chances of a major trade war and ease pressures from global economic imbalances.

The People's Bank of China said it revalued the yuan from 8.28 to the dollar to 8.11 to "bring imports and exports into balance".

Its statement said: "The bank will make adjustment of the exchange rate band when necessary according to market development as well as the economic and financial situation. The exchange rate will be more flexible based on market conditions with reference to a basket of currencies."

The revaluation was the culmination of months of political lobbying by the G7 rich nations on China to allow its currency to adapt to its booming economy and take the pressure off the dollar and the euro.

The US, Japan and Europe have complained that an undervalued exchange rate gave the world's most populous nation an unfair trade advantage.

John Snow, who, as US Treasury Secretary led the diplomatic campaign, said: "Today's developments are extremely positive. They've put in place a mechanism that provides room for significant movement over time in the currency, and they've expressed a commitment to using market forces to let the currency move."

Tom Dawson, the IMF's chief spokesman, said: "Greater [exchange rate] flexibility is very much in China's best interest."

Sadakazu Tanigaki, the Japanese Finance Minister, said: "A move toward flexibility is a plus for the world economy."

Financial economists said the change would diffuse trade tensions with the US, help China fight inflation and allow other countries in Asia and Eastern Europe to compete in the export market.

Gerard Lyons, head of global research at Standard Chartered Bank, said China's move was "gradual, flexible and sensible", adding: "It is a further sign of China's emergence as a global economic player."

Experts said the revaluation would lance some of the protectionist pressure in the US, where the Senate recently voted to support a proposal to impose tariffs of 28 per cent unless China revalued by a similar amount.

Stephen Roach, the chief economist at Morgan Stanley, said: "It diffuses US-led political tensions. A 2.5 per cent move stops well short of 27.5 per cent but it is a start and suggests that more such moves will be in the offing."

But other economists said that the modest scale had "opened a Pandora's box" as it raised more questions about Chinese policy than it answered.

Stuart Thomson, at stockbrokers Charles Stanley Sutherland, said: "It remains to be seen whether this cynical ploy is enough to deflect protectionist sentiment in the US."

The yen soared to a three-year high against the dollar while other Asian currencies all advanced in line with China's move.

Shares of commodity exporters to China rose - although that was offset in the US by worries over the latest London bombs.

Andrew Holliman, manager of the Threadneedle American Growth Fund, said: "The revaluation should be good news for equities as it takes the pressure off other nations, notably the US, to adopt market-unfriendly protectionist policies."

- INDEPENDENT