China Central Bank Says Yuan Managed Float Is `Fundamental' for Economy

China needs to follow a managed float of its exchange rate to aid restructuring, said Hu Xiaolian, deputy governor of the People’s Bank of China.

The policy will help deliver more resources to the service sector and promote the upgrading of industries, she said in comments posted on the central bank’s website. Lack of flexibility may trigger a financial crisis, she said.

The yuan has strengthened 0.8 percent versus the greenback since the central bank said on June 19 it would end the yuan’s two-year peg to the dollar and manage the rate with reference to a currency basket. China had kept the yuan stable at about 6.83 per dollar since July 2008, having allowed it to gain 21 percent in the previous three years.

A more flexible exchange rate is “a fundamental need for economic restructuring and optimizing resources allocation,” Hu said. It will “reduce China’s trade imbalance and excessive reliance on exports, and help sustain economic growth by relying more on domestic demand.”

Medium-sized and large economies will find it difficult to sustain a currency peg over the long term and it can cause trade friction and protectionism, according to the statement.

She reiterated the central bank will keep the yuan “basically stable at a reasonable, balanced level,” and promote balance in China’s international payments.

--Belinda Cao. Editors: Nerys Avery, Sandy Hendry

To contact Bloomberg News staff for this story: Belinda Cao in Beijing at +86-10-6649-7570 or lcao4@bloomberg.net

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