China Announces it Will Further Reform its Currency
The People’s Bank of China announced on June 19, 2010, that it will further reform the renminbi (RMB or yuan) exchange rate regime and enhance its exchange rate flexibility.
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The Bank states that it is taking these measures in light of the recent economic situation and financial market developments at home and abroad. According to the Bank:
Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.
When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.
The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.
RMB exchange rate regime. In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.
RMB exchange rate flexibility. China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the Bank’s account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The Bank will further enable the market to play a fundamental role in resource allocation, promote a more balanced Bank account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.
Congress Sees China’s Announcement as a “First Step,” Awaits Further Action
Various members of Congress issued statements following China’s announcement, including:
- House Ways and Means Committee Chairman Levin (D), who stated that he welcomed China’s decision as a positive first step, but that it remains to be seen whether this move will be more symbolic than significant.
- Senate Finance Committee Chairman Baucus (D), who stated that he will be working closely with the Administration and other Members of Congress to ensure that China is kept accountable.
- Senate Finance Committee Ranking Member Grassley (R), who noted that China’s announcement is long overdue and Congress and the Administration need to keep the pressure on until China takes concrete actions to appreciate its currency exchange rate in a meaningful way.