China unshackles yuan ahead of G20 summit

China's central bank has maintained a de facto peg since the middle of 2008, a controversial policy aimed at steadying the world's fastest-growing major economy during the global economic downturn.

But the People's Bank of China (PBOC) stepped aside on Monday to back up its surprise weekend announcement that it would allow more flexibility for the yuan, buying some time against critics who argue the currency is undervalued and gives China an unfair advantage in trade.

US stocks climbed on Monday, mirroring gains on overseas markets, as investors bet that China's currency move would invigorate global economic recovery and raise long-term prospects for US multinationals.

China's central bank, after setting the mid-point for Monday's trading range, let the yuan rise 0.42 percent to 6.7976 per dollar - both the biggest daily gain and the highest close since China revalued the currency and introduced a managed float regime in 2005.

At one point, the yuan was up as much as 0.47 percent from the day's mid-point - just shy of the currency's 0.5 percent limit, which had rarely been tested in practice in the past.

Traders said the lack of intervention by the central bank suggested it wanted the market to drive intraday trade and so underline its weekend pledge.

But it also showed it had ultimate control by setting the reference rate, around which the yuan can trade, at the same level as Friday's fixing.

Traders said it was unlikely the yuan would repeat gains on the same scale in coming days, with Tuesday's mid-point setting serving as an important barometer of how much more appreciation the central bank is willing to stomach.

"It is still too early to say what the PBOC is going to do in the coming days but we expect the trend to be gradually lower rather than volatile," said Callum Henderson, global head of FX strategy at Standard Chartered Bank in Singapore.

"Tomorrow's fixing is awfully key in terms of the sentiment of the market. One can pontificate on what is going to happen based on one day, but frankly it is a guessing game on what is going to happen. We will have to see the fixing tomorrow and that should set the tone for the next couple of days."

China's economic strength gave policymakers confidence to end the peg, but they remain worried demand for China's exports is not on a solid footing given risks like Europe's debt woes.

Chinese Commerce Ministry spokesman Yao Jian told the official Xinhua news agency that yuan reform could put pressure on exports initially, as firms were likely to face higher material costs, but would yield long-term benefits.

"In the long run, however, export businesses would improve business management and expand the industrial chain to make themselves more competitive internationally," the agency paraphrased Yao as saying.

The central bank ruled out a one-off revaluation of the currency and suggested the yuan's value was close to fair value.

Still, analysts said China needs to show the G20, whose leaders meet June 26-27 in Canada to discuss issues including global trade imbalances, that it is serious in its commitment to make the yuan more flexible.

US Ambassador to China Jon Huntsman called China's move on the yuan a "genuine attempt" at currency reform and predicted it could smooth sometimes testy relations between Beijing and Washington.

"I think it takes an irritant off the table in the US-China relationship," Huntsman said following a speech in Hong Kong.

But some of China's strongest critics in the US Congress are unlikely to be impressed, and the United States itself has called for "vigorous implementation" of the policy, Kazinform cites Arab News. See www.arabnews.com for full version.