China's yuan policy aims to ease criticism

SHANGHAI - By loosening its currency's peg to the dollar, China is seeking to defuse complaints that it keeps its exports artificially cheap, strengthen its hand against inflation, and ensure that its economy can keep growing at a healthy pace.

The Chinese yuan surged to a record high Monday as Beijing delivered on its central bank's weekend promise of greater flexibility in its exchange rates.

Analysts described the step as a maneuver aimed mainly at countering criticism of Beijing's currency policies before next weekend's summit of the Group of 20 leading economies.

"This is a type of 'diplomatese' before the G-20," said Yi Xianrong, a prominent economist at the Institute of Finance in the Chinese Academy of Social Sciences, a government think tank.

Beijing's trading partners have been frustrated by their perennial trade imbalances with China. A lower value of the yuan makes the country's exports relatively inexpensive compared with products of other countries.

Beijing linked the yuan to the U.S. dollar two years ago to help its exporters during the recession. The decision last weekend to give up the link shows China recognizes the need for flexibility in its economic policies.

"Chinese policymakers are attempting to engineer a scenario that maximizes political goodwill while at the same time minimizes any negative economic impact," said Alaistair Chan, an economist at Moody's Analytics in Sydney, Australia.

The shift away from the dollar peg pushed the yuan to 6.7971 on Monday from 6.8272 yuan Friday. It was an abrupt break from the narrow range around 6.83 yuan to $1 that had held since mid-2008.

The central bank still sets the exchange rate each day before the start of trading and limits daily fluctuations to 0.5 percent. Its announcement late Saturday stressed China's commitment to keeping the currency stable.

Allowing greater flexibility suits China's own needs. Apart from helping Beijing fight inflation, it should encourage manufacturers to improve efficiency and reduce the country's reliance on exports as a driver for growth, the central bank said.

By ruling out any one-time major revaluations, the People's Bank of China also doused speculation over such moves and removed a source of uncertainty for investors. China's share market responded by jumping nearly 3 percent Monday.

The decision to revert to a basket of currencies including the U.S. dollar, rather than the dollar alone, to set the exchange rate restores policies in place before the global downturn walloped Chinese manufacturers in 2008. Millions lost their jobs.

China had set up the basket-linked exchange-rate system in July 2005, allowing the yuan to gradually gain nearly 20 percent until the financial crisis hit.