China Seeks to Publish Regular Gauge of Yuan Against Basket of Currencies
China’s central bank will seek to publish a measure of the yuan’s value “regularly” to help it manage the exchange rate against a basket of currencies and not just the dollar, Deputy Governor Hu Xiaolian said.
The People’s Bank of China aims to publish the nominal effective exchange rate and this “should gradually become a reference for exchange-rate adjustments,” Hu said today in a statement on its website. These indexes are typically weighted according to the amount of trade a nation has with its partners and aren’t adjusted for inflation. She said this will help shift the market’s attention away from the rate against the greenback.
“This is very important as it will make things more transparent, making it more likely that the yuan does trade against the basket and not the dollar,” said Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB. “Demand for both the dollar and Treasuries would be lower if China does move to the effective basket.”
Premier Wen Jiabao in March urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The country has the biggest overseas holdings of U.S. Treasuries and cut its investment in the securities by $32.5 billion in May to $867.7 billion, the biggest decline this year.
Stability Sought
The yuan has strengthened 0.7 percent versus the greenback since the central bank said on June 19 it would end a two-year peg to the dollar and manage the exchange rate with reference to a currency basket. It has weakened 0.7 percent against a basket of trade-weighted currencies in the period as the euro and the yen both rallied against the dollar, according to an index compiled by Westpac Banking Corp.
“The yuan should be kept stable at a reasonable and balanced level overall, while it may have two-way moves against particular currencies,” Hu said, adding that the composition of the central bank’s currency basket should be mainly based on trade weightings.
“The euro has been strengthening recently, but if it was to weaken again, then the PBOC’s trade-weighted measure of the yuan would come in handy in justifying only small gains against the dollar,” said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc. “It is a way for China to deflect pressure from the U.S.”
U.S.-China Ties
Any sustained weakening of the yuan could set China on a collision course with trading partners, who say the nation’s exports are bolstered by an undervalued currency. Obama said last month he expected the yuan to rise “significantly.” China had kept the currency at about 6.83 per dollar since July 2008, after allowing it to gain 21 percent in the previous three years.
While Beijing is trying to shift the U.S.’s focus off the bilateral exchange rate, “the U.S. politicians will not be distracted,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd.
Chinese central bank adviser Zhou Qiren said that the nation will let the yuan weaken if exports fall sharply, according to an interview published on July 21 in Japan’s Asahi newspaper. He also said the peg should have been ended earlier because the economy has overheated.
--Belinda Cao, Sophie Leung, Yumi Teso. Editors: Sandy Hendry, James Regan
To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
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