Beijing allows yuan to fall in value

(News Today) - China let the renminbi drop slightly in value against the dollar on Tuesday in a move that analysts said was designed to deter speculators benefiting from a stronger Chinese currency.

The central bank initially set the reference point for the day's trading 0.43 per cent above Monday's level, to the highest level in five years, which appeared to be a signal that it was comfortable to see further modest appreciation in the currency.

However, although the renminbi initially rose against the dollar, by the end of trading it had fallen 0.23 per cent to Rmb6.8136. Traders said state-owned banks had been in the market buying dollars, which they saw as a sign that the authorities were trying to control tightly the value of the renminbi and limit expectations of future gains. On Monday the currency rose 0.42 per cent against the dollar.

Movements in the Chinese currency have been under intense scrutiny this week after the central bank announced on Saturday that it would introduce a more flexible exchange rate regime. This was widely interpreted to mean a return to gradual appreciation against the US dollar.

China's currency move: Why now?

The fact that the renminbi weakened against the dollar in the second day of trading under the new policy was likely to embolden those sceptics, especially in the US Congress, who viewed the weekend announcement as a political ploy to disarm criticism of China's exchange rate policy at a time when there was little real support in Beijing for a stronger currency.

RenminbiHowever, traders and economists in China said the trading movements reflected government concern to try to avoid a rapid inflow of speculative capital. By signalling that the currency was now likely to get stronger, officials feared that they could be establishing a "one-way bet" for investors.

"The renminbi went down today because the central bank wants to have more flexibility and more two-way movement in the exchange rate," said Lu Zhengwei, an economist at Industrial Bank in Shanghai.

China currency: Are you a winner or loser?

Chinese officials have been talking since the weekend about introducing more volatility into daily trading and have said the authorities would use a basket of currencies of China's main trading partners to guide the renminbi. The implication of using the basket, officials said, was that the renminbi could potentially depreciate against the dollar if the euro were to weaken.

However, some analysts doubted that the authorities would let the currency depreciate substantially against the dollar for fear of provoking a protectionist backlash in the US.

"We still may see moves in either direction from day to day but we think the trend in the weeks and months ahead will be for the renminbi to make limited but meaningful gains against the dollar," said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

Q&A: China's currency moves

Analysts believed that a large part of the timing of China's announcement was this weekend's summit in Toronto of the Group of 20 leading economies, where the renminbi had been shaping up to be one of the main subjects.

Qin Gang, a spokesman for the Chinese foreign ministry, urged other G20 governments not to "engage in mutual accusations and pressure" at the summit.

Although the decision has been criticized by some Chinese citizens as giving into US pressure, there has been no public criticism from other parts of the government. Yao Jian, a spokesman for the Chinese Commerce Ministry, which had campaigned openly against a stronger currency, said in the long-run the new policy would help Chinese exporters improve their competitiveness.

Source : CNN

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