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China to allow more exchange rate flexibility

BEIJING — President Barack Obama welcomed China's announcement Saturday that it will allow a more flexible exchange rate for its currency, saying it would help protect the economic recovery.

The announcement by China's central bank suggested a possible break from the yuan's two-year peg to the U.S. dollar — a source of friction between the two countries — but ruled out any large-scale appreciation.

The People's Bank of China mentioned no specific policy changes, though markets will be watched closely Monday for the announcement's effects. Chinese officials have said all along that reforms of the yuan, also known as the renminbi, or "people's money," will be gradual.

The announcement, timed just before President Hu Jintao's trip to the G-20 summit in Toronto, Canada, follows warnings from Beijing last week against making its currency policies a main focus of the meeting.

Beijing kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand. It faces pressure from the United States and other trading partners who contend the yuan is undervalued.

"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.

U.S. Treasury Secretary Timothy Geithner called the move an "important step."

"But the test will be how far and how fast they let the currency appreciate," he said.

The European Commission also welcomed the decision, saying it would help achieve more sustainable global economic growth, reduce trade imbalances and strengthen the stability of the international financial system.

But the announcement is unlikely to satisfy critics in the U.S. Congress, who argue that an undervalued Chinese currency gives China's exporters an unfair advantage, costing millions of American jobs.

"This vague and limited statement of intentions is China's typical response to pressure," Sen. Charles Schumer, a New York Democrat, said in a statement.

China to allow more exchange rate flexibility 06/19/10 [Last modified: Saturday, June 19, 2010 10:12pm]
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