China to allow the yuan to float more freely – BBC News

14 March 2012
Last updated at 01:56 ET

China has said it will allow the yuan to float more freely as part of its efforts to reform its currency policy.

The move comes as China has been facing pressure from its trading partners to let the yuan appreciate.

Beijing has been accused of keeping the value of its currency artificially low to help its exporters.

While Premier Wen Jiabao said Beijing will push for reforms, he added that the yuan’s value may already be close to an optimum level.

“We will step-up exchange rate reforms, especially in increasing two-way fluctuations,” premier Wen Jiabao said on the last day of the National People’s Congress meeting.

“In the Hong Kong market, NDFs (non-deliverable forwards) have started to fluctuate both ways. This tells us the yuan is possibly near a balanced level.”

‘No point in predicting’

China, which for many years pegged its currency to the US dollar began to allow the yuan to appreciate in 2005, but in a very measured way.

It has risen by almost 8% in the past 24 months against the US currency.

However, China’s trading partners as well as currency analysts continue to maintain that despite the rise, the yuan is still undervalued. This, critics believe, gives China an unfair advantage in international trade.

“The currency has come a long way. But is still has a fair way to go,” Sean Callow of Westpac told the BBC.

Meanwhile, China has said that while it was willing to let the yuan appreciate, a sudden rise in its value will hurt its export sector, which is already facing a tough time as key markets in the US and eurozone experience sluggish growth.

The fear for China is that a strong currency will make its goods more expensive to foreign buyers.

At the same time, profits of manufacturers may also be dented when they repatriate their foreign earnings back home.

Analysts said that until Beijing feels absolutely secure about the impact of a stronger yuan on the export and manufacturing sectors, it may continue to keep tight controls on the currency’s trade.

“We have heard it so many times that there is no point in predicting when it will happen,” Mr Callow said.