China on Saturday announced that it would take steps to let the yuan appreciate against the U.S. dollar in tandem with a demand for the same from America.

The People's Bank of China on Saturday said it would “proceed further with the reform” of the renminbi/yuan exchange rate regime to “enhance its exchange rate flexibility''.

The Chinese central bank said the decision had been made in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments situation in the country.

In further proceeding with the reform, continued emphasis will be placed to reflecting market supply and demand with reference to a basket of currencies, the official Xinhua news agency quoted the central bank as saying.

The bank, however, reiterated that it would continue to manage the floating exchange rate “within the band already announced” ruling out a major fluctuation/appreciation. The yuan traded at 6.8267 against the dollar on Saturday without showing any significant appreciation.

It is to be seen early next week how much the yuan would appreciate. The exchange rate was pegged at around 6.8 per dollar since 2008 and China so far resisted pressures to let it float fearing large scale erosion in profits in exports which, in turn, can lead to closure of industrial units and job losses.

Positive contribution to global growth

The U.S. on Saturday welcomed the Chinese decision to increase the flexibility of its exchange rate and said it would make positive contribution to strong and balance global growth.

“We welcome China's decision to increase the flexibility of its exchange rate. Vigorous implementation would make a positive contribution to strong and balanced global growth,” Treasury Secretary Timothy Geithner said.

“We look forward to continuing our work with China in the G-20 and bilaterally to strengthen the recovery,” Mr. Geithner said in a statement.

IMF welcomes

The People's Bank of China's announcement to increase exchange rate flexibility and return to the managed floating exchange rate regime in place prior to the global financial crisis is a very welcomed development, said IMF Managing Director Dominique Strauss-Kahn.

“A stronger renminbi is in line with findings of the G-20 Mutual Assessment Process, to be presented in Toronto next week, and will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer,” he said in a statement.

Keywords: forexdollaryuan

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