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China says to start withdrawing from currency market
Last Updated(Beijing Time):2006-06-01 13:07

China's central bank said it will start withdrawing from the country's currency market, allowing investors a greater role in setting exchange rates.

The People's Bank of China sets daily reference rates for trading around which its currency is allowed to move, buying and selling the yuan to keep its value stable. U.S. lawmakers accuse China of using such measures to artificially weaken the yuan and fuel an export boom that has expanded the U.S. trade deficit with the Asian country to a record for five straight years.

"The frequency and strength of the central bank's open market currency operations will gradually weaken and be phased out,'' the bank said in its quarterly monetary policy report.

The Chinese yuan today had its biggest gain in six weeks, paring a loss for the month that was the first since the country July 21 ended a decade-old peg to the dollar. The U.S. Treasury stopped short in May of labeling China a currency manipulator in a twice yearly report, prompting criticism from lawmakers who are sponsoring legislation that may lead to sanctions unless the currency is allowed to strengthen.

The Japanese yen also climbed against the dollar after the central bank statement on speculation a stronger yuan would lift the cost of China's exports abroad and make it cheaper for the country to import goods, helping the economies of Asian rivals.

"The rate of yuan appreciation is likely to pick up in 2006,'' said Duncan Innes-Ker at the Economist Intelligence Unit in London. "It makes a lot of sense to allow the currency to rise and encourage more reliance on the domestic market.''

Group of Seven

Finance ministers from the Group of Seven nations said in Washington on April 21 that it is ``critical'' for countries in Asia, and particularly China, to let their currencies appreciate to reduce trade imbalances that threaten global economic growth. The U.S. trade deficit with China reached $201.6 billion in 2005.

The yuan today gained 0.1 percent to 8.0219 by 3:30 p.m. in Shanghai. It is up 1.1 percent since the end of the dollar-peg.

Asian central banks such as those in China, South Korea and Taiwan typically buy dollars to keep exchange rates stable and help protect export-led economic growth, pushing up their foreign-exchange reserves. The three economies are among the world's top five holders of such reserves.

China will sustain annual economic expansion of about 10 percent, the central bank said today on its Web site, adding that investment is too rapid and threatens to stoke inflation. Exports propelled growth in China to the fastest pace among the world's 20 largest economies in the first quarter of this year.

'Cool its Economy'

"China is trying to cool its economy down as the momentum of growth has been very strong, and allowing the currency to gain is part of that,'' Marcus Hettinger, a currency strategist at Credit Suisse Group, said in Zurich. "More flexibility of the yuan is good for Asian currencies, especially the yen.''

The yen strengthened as far as 111.46 yen to the dollar in London trading, from about 112.13 before the release.

Since China's central bank ditched the dollar-peg last year, it has taken further steps to reduce its dominance over setting exchange rates, including naming 15 banks as market makers, who stand ready to buy and sell the yuan to companies and investors.

The bank today said it will increase contacts with several of those lenders to help it better monitor demand and supply for the yuan, and gauge the action it takes in the market.

Premier Wen Jiabao said at the close of the Chinese parliament's annual meeting on March 14 the government would "add more flexibility to the exchange rate's trading band,'' though there wouldn't be any sudden revaluation in the yuan.

'In the Long Run'

The policy statement by the central bank today echoed those remarks, said Qing Wang at Bank of America in Hong Kong.

"The central bank meant that in the long run, when supply and demand in the currency market reaches an equilibrium, then it doesn't have to step in to buy or sell,'' said Wang, a currency strategist. ``It may not be achieved anytime soon."

China's foreign-currency reserves have overtaken those of Japan to become the world's largest as the central bank buys dollars and sells yuan to keep the exchange-rate stable. Its holdings surged 32.8 percent from a year ago to $875.1 billion as of the end of March, the central bank said on April 14.

Senators Charles Schumer and Lindsey Graham propose a 27.5 percent tariff on Chinese imports should the yuan fail to rise faster. Schumer on May 10 said he was ``disappointed'' with the Treasury's decision to refrain from naming China a manipulator. (Bloomberg) 
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