China hints at yuan rise ahead of Obama's visit

posted: 13 DAYS 14 HOURS AGO

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BEIJING -China signaled Thursday that it's ready to allow its currency to rise just days ahead of a visit by President Barack Obama.

China's central bank said in its quarterly monetary policy report that it will improve the yuan exchange rate formation mechanism by taking into account changes in major currencies and not just the dollar.

By omitting its often-used language of keeping the yuan "basically stable at a reasonable and balanced level," the bank is suggesting a policy shift on yuan's exchange rate, analysts said. Beijing has held down its currency for more than a year.

The comments came three days ahead of Obama's visit to China. The president has said he would raise the issue of China's currency during his trip.

"The reference to changes in major currencies could signal a shift from the current de facto dollar peg to include other currencies such as the euro and yen," Alaistair Chan, an associate economist of Moody's Economy.com, said in a note.

The yuan's appreciation started in July 2005. But after rising nearly 20 percent, the currency has hovered around 6.83 to the dollar for more than a year as China took measures to protect local exporters battered by the global economic crisis.

"The yuan will certainly rise but not by a big pace. It is facing double-folded pressure," said Lu Zhengwei, a senior economist at China's Industrial Bank Co. in Shanghai.

Because the yuan is pegged to the dollar, which has weakened against other major currencies recently, Beijing faces increased pressure from other emerging economies that complain the weaker yuan means Chinese products were cutting into their share of the global marketplace.

But Lu said if China lets the yuan appreciate, it will hit exporters as business starts to pick up.

China's trade surplus in October totaled $24 billion, nearly double from September, while the slump of exports was the slowest in 10 months.

The central bank's report came after China reported improving industrial output, retail sales and trade figures for October, showing the country's economic recovery is on track.

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On the Net:

Chinese central bank: http://www.pbc.gov.cn (in Chinese)

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Associated Press researcher Bonnie Cao contributed to this report.

2009-11-12 05:22:14