World hopes China's yuan will rise, bring relief

BEIJING — China's decision to end its currency's 2-year-old peg to the U.S. dollar is stirring anticipation of a gradual appreciation in the yuan in trading Monday — an increase that would bring relief to foreign manufacturers struggling to compete with cheap Chinese products.

Beijing has long refused to allow the yuan, also known as the renminbi, to float and denied accusations that its currency is unfairly undervalued. The debate became particularly strident during the global recession, when manufacturers from Brazil, Europe, the U.S. and elsewhere were especially stung by China's ability to keep the prices of its exports low.

But the Communist leadership has finally acceded to foreign pressure just a week ahead of a summit of the G-20, where President Hu Jintao would likely to have been hammered by critics of the currency policy.

China, however, is still steering a path to recovery, and with workers at home demanding wage hikes — which would also increase the price of exports — the central bank has sought to curb speculation of a major strengthening of the yuan's value.

"There is at present no basis for major fluctuation or change in the renminbi exchange rate," the People's Bank of China said in a lengthy commentary posted on its website Sunday.

Keeping the rate at a "reasonable, balanced level" would contribute to economic stability and help restructure the Chinese economy with greater emphasis on services and consumption, the statement said.

The yuan's value has been pegged to the U.S. dollar for two years, causing major friction with countries who say the yuan is undervalued to China's own benefit. The bank's statement said it would rely more on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone.

Chinese officials have long said reforms to the currency would be gradual. While no specific policy changes were mentioned, financial markets will be watched closely Monday for any effects.

President Barack Obama said China's move would help protect the economic recovery, while the European Commission said it would benefit "both the Chinese economy and the global economy."

The announcement follows warnings from Beijing last week against making its currency policies a main focus of the G-20 summit, being held June 26-27 in Toronto, Canada.

Industrial Bank economist Jiang Shu said the timing of the announcement marked an attempt to alleviate such pressures and forestall criticism of China at the summit.