China's more flexible yuan edges down vs. dollar

[June 22, 2010]  SHANGHAI (AP) -- Proving that flexibility is a two-way street, the Chinese yuan edged lower against the U.S. dollar in spot trading Tuesday, a day after surging to a new high following the central bank's decision to let the currency trade in a wider range.

By early afternoon, the yuan was quoted at about 6.82 to the U.S. dollar. It had strengthened to 6.7925 before dropping back after appreciation pressures eased.

"They have backtracked a little. They want to show it's a bit more free-floating than before," said David Cohen, director of Asian economic forecasting for the consultancy Action Economics in Singapore.

The People's Bank of China announced Saturday plans to allow greater flexibility in exchange rates, moving to blunt accusations that its currency policies keep the yuan undervalued against the dollar, giving Chinese exporters an unfair advantage in overseas markets.

The shift away from the dollar peg pushed the yuan to 6.7971 on Monday from 6.8272 yuan on Friday. That shift of 0.4 percent was an abrupt break from the narrow range around 6.83 yuan to $1 that had held since mid-2008.

In place of the dollar peg, the central bank has restored its practice of setting the yuan's exchange rates against a basket of currencies, including the dollar. After that system was set up in 2005, the yuan gained nearly 20 percent against the dollar, until Beijing halted its rise two years ago to help protect its exporters from the global downturn.

Beijing has ruled out any major revaluations for the yuan, saying the currency is at about the right level. Pressures on the yuan are generally upward: Because China usually runs huge trade surpluses, the central bank buys up excess foreign exchange to keep the yuan's value steady.

In the medium-term, the trend is still expected to be toward a stronger yuan.

"A lot will depend on where the dollar will go," Cohen said.

Yi Xianrong, a prominent Chinese economist at the Chinese Academy of Social Sciences, warns that the yuan is unlikely to rise even at the modest pace it climbed at in 2005-2008.

"China has to keep the currency stable under the current circumstances and will certainly take any consequences of the yuan's appreciation very seriously," Yi said.

The central bank still sets the exchange rate each day before the start of trading -- Tuesday's opening rate was 6.7980 -- and limits daily fluctuations to 0.5 percent.

In the short run, abandoning the dollar peg may help Beijing counter criticism from its trading partners, especially the U.S.

China's rapid rebound from the global downturn and a recovery in demand for its exports had fueled speculation that Beijing would loosen the dollar peg, allowing the yuan to rise by several percent against the dollar this year.

In the longer run, greater currency flexibility also suits China's own need for greater leeway in countering inflation and may push its manufacturers to improve efficiency, while reducing the country's reliance on exports as a driver for growth, the central bank says.

[Associated Press; By ELAINE KURTENBACH]

Associated Press researcher Ji Chen contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.