China’s announcement that it will resume currency reform made waves globally but caused barely a ripple at home on Sunday, with major newspapers merely reprinting the central bank’s statement.

The People’s Daily, the main organ of the ruling Communist Party, put the news on its back page, while the banner headline on the website of the official Xinhua news agency was about torrential rain in southern China.

Subdued domestic reporting of the central bank’s decision to make the yuan more flexible after locking it to the dollar for nearly two years marked a sharp contrast to the global reaction.

Leaders of the United States, the European Union, Japan and the International Monetary Fund, among others, all welcomed the move as a hopeful contribution to balancing the world economy.

Chinese economists who spoke to clients and foreign reporters said it was a step that was justified economically and, above all, had a political aim.

“This important declaration by the Chinese government coming before the G20 summit is a big concession to prevent the yuan’s exchange rate from being politicized by Western countries,” said Gao Shanwen, chief economist at Essence Securities in Beijing.

Global equity markets may rally on Monday as the news, coming a week before a Group of 20 meeting in Canada, eases fears of a trade row between the United States and China at a delicate time for the world economy.

The People’s Bank of China said in its statement that holding the yuan in a de facto peg to the dollar since July 2008 had helped mitigate the impact of the global financial crisis and spur the world’s recovery.

With the economy on a more solid footing, it was time to enhance the exchange rate’s flexibility, though the basis did not exist for “large-scale appreciation,” it said.

All eyes on Monday will be on the daily reference rate set by the Chinese central bank to manage the yuan’s value. Many economists believe that Beijing will nudge the exchange rate higher in increments, not leaps.

SURPRISE AND CONTROVERSY

Markets have long been waiting for China to break the yuan’s peg to the dollar, but the timing still came as something of a surprise.

One day earlier, senior officials had stressed that China would not be bullied into resuming yuan appreciation.

The Chinese media will not stay quiet forever. The lack of articles, editorials and commentaries for the time being likely reflected a push by the government to get everyone on message about what could be a controversial policy change.

Most websites blocked users from posting comments about the central bank’s statement, a measure normally reserved for only the most sensitive of news items.

On a few sites, however, readers were still free to make their views heard. They made clear that the government had its work cut out to win over public opinion.

“This is such worrying news! China, you have surrendered!” wrote one online reader of the Global Times, a popular tabloid.

“Why is China so scared of the United States?” wondered another.

“We’re so well-behaved, doing whatever the United States asks of us,” wrote a third, sarcastically.

Whether U.S. critics of China’s currency regime will agree remains to be seen.

INTENSE CRITICISM

Beijing has come under intense criticism from abroad for keeping the yuan artificially cheap even as the country’s export juggernaut roared back to life.

Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China’s policy was seen as stealing jobs from foreign markets.

U.S. patience with Beijing over the yuan had worn thin and lawmakers threatened to penalize it for a strategy they said was unfair and broke rules of global trade.

The announcement by the Chinese central bank explicitly ruled out a one-off revaluation or major appreciation, suggesting that the yuan will return at most to the path of gradual gains against the dollar followed for three years until mid-2008.

Democratic Senator Charles Schumer, a leading critic, said China’s statement was too vague and pledged to press ahead with legal action to raise trade barriers.

Treasury Secretary Timothy Geithner, who has delayed publication of a potentially embarrassing report that could cite China as a currency manipulator, stressed that China’s actions would speak louder than words.

“This is an important step but the test is how far and how fast they let the currency appreciate,” he said.
The People’s Daily, the main organ of the ruling Communist Party, put the news on its back page, while the banner headline on the website of the official Xinhua news agency was about torrential rain in southern China.

Subdued domestic reporting of the central bank’s decision to make the yuan more flexible after locking it to the dollar for nearly two years marked a sharp contrast to the global reaction.

Leaders of the United States, the European Union, Japan and the International Monetary Fund, among others, all welcomed the move as a hopeful contribution to balancing the world economy.

Chinese economists who spoke to clients and foreign reporters said it was a step that was justified economically and, above all, had a political aim.

“This important declaration by the Chinese government coming before the G20 summit is a big concession to prevent the yuan’s exchange rate from being politicized by Western countries,” said Gao Shanwen, chief economist at Essence Securities in Beijing.

Global equity markets may rally on Monday as the news, coming a week before a Group of 20 meeting in Canada, eases fears of a trade row between the United States and China at a delicate time for the world economy.

The People’s Bank of China said in its statement that holding the yuan in a de facto peg to the dollar since July 2008 had helped mitigate the impact of the global financial crisis and spur the world’s recovery.

With the economy on a more solid footing, it was time to enhance the exchange rate’s flexibility, though the basis did not exist for “large-scale appreciation,” it said.

All eyes on Monday will be on the daily reference rate set by the Chinese central bank to manage the yuan’s value. Many economists believe that Beijing will nudge the exchange rate higher in increments, not leaps.

SURPRISE AND CONTROVERSY

Markets have long been waiting for China to break the yuan’s peg to the dollar, but the timing still came as something of a surprise.

One day earlier, senior officials had stressed that China would not be bullied into resuming yuan appreciation.

The Chinese media will not stay quiet forever. The lack of articles, editorials and commentaries for the time being likely reflected a push by the government to get everyone on message about what could be a controversial policy change.

Most websites blocked users from posting comments about the central bank’s statement, a measure normally reserved for only the most sensitive of news items.

On a few sites, however, readers were still free to make their views heard. They made clear that the government had its work cut out to win over public opinion.

“This is such worrying news! China, you have surrendered!” wrote one online reader of the Global Times, a popular tabloid.

“Why is China so scared of the United States?” wondered another.

“We’re so well-behaved, doing whatever the United States asks of us,” wrote a third, sarcastically.

Whether U.S. critics of China’s currency regime will agree remains to be seen.

INTENSE CRITICISM

Beijing has come under intense criticism from abroad for keeping the yuan artificially cheap even as the country’s export juggernaut roared back to life.

Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China’s policy was seen as stealing jobs from foreign markets.

U.S. patience with Beijing over the yuan had worn thin and lawmakers threatened to penalize it for a strategy they said was unfair and broke rules of global trade.

The announcement by the Chinese central bank explicitly ruled out a one-off revaluation or major appreciation, suggesting that the yuan will return at most to the path of gradual gains against the dollar followed for three years until mid-2008.

Democratic Senator Charles Schumer, a leading critic, said China’s statement was too vague and pledged to press ahead with legal action to raise trade barriers.

Treasury Secretary Timothy Geithner, who has delayed publication of a potentially embarrassing report that could cite China as a currency manipulator, stressed that China’s actions would speak louder than words.

“This is an important step but the test is how far and how fast they let the currency appreciate,” he said.

By Ben Blanchard

Tags: bank of china, central bank, China, Chinese economy, economists, european union, financial leaders, Global Economy, global financial crisis, IMF

This entry was posted on Saturday, June 19th, 2010 at 11:57 pm and is filed under Chinese Finance, Economic Turmoil, Global Economy, Global Financial, Market Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.