In a long-awaited but unexpected move, China announced on July 21 that its currency will no longer be pegged to the US dollar. From now on the exchange rate of China’s yuan, orrenminbi, will be made in reference to a basket of currencies, the People's Bank of China (PBOC) said, adding that it marked the introduction of ‘a more flexible mechanism for the exchange rate's formation.’ However, the PBOC did not specify what currencies would be in the basket.
The central bank strengthened the exchange rate of the renminbi to 8.11 to the dollar, up from 8.28, where it had been fixed for years. The change amounts to a 2% appreciation of the renminbi. The reform is ‘in the interests of the country’s long-term, fundamental interests’, the central bank said in a separate statement.
Pursuing a more flexible, market-based foreign exchange system has been on the agenda for China’s economic reform. A more flexible exchange rate system will be important in improving the country's macro-economic adjustment system and in giving the market more influence in allocating resources, the central bank said. In the short term, the move could have some negative effects on economic growth and employment. But the bank believes the overall benefits will outweigh any disadvantages.
The US dollar’s exchange rate with the yuan will be allowed to fluctuate by 0.3% in the foreign exchange market. Fluctuation of other foreign currencies’ rates towards the yuan will also be limited within certain ranges. The central bank would adjust fluctuating ranges according to the development of the foreign exchange market and the economic and financial situation, it said.
The United States praised China’s decision to move to a more flexible currency system.
‘I welcome China's announcement today that it is adopting a more flexible exchange rate regime,’ Treasury Secretary John Snow said in a statement.
Immediately after the move, Malaysia said it was also unpegging its currency, ringgit, from the US dollar and replacing it with a managed float. But Hong Kong said it would retain its currency peg with the US dollar. ‘The government has no intention at all of changing the Linked Exchange Rate system, which has served Hong Kong well for more than 21 years and has been the anchor of our economic stability,’ the city’ acting financial secretary Stephen Ip said.
