Source: China Daily

02-27-2008 16:15

In a long-awaited but unexpected move, China yesterday announced that its currency will no longer be pegged to the US dollar.

From now on the renminbi, or yuan's, exchange rate will be made in reference to a basket of currencies, the People's Bank of China (PBOC) said, adding that it marked the introduction of "a more flexible mechanism for the exchange rate's formation."

The central bank did not specify what currencies would be in the basket.

The central bank strengthened the exchange rate of the renminbi to 8.11 to the dollar, up from 8.28, where it had been fixed for years, it said in a surprise announcement on the State television evening news.

The change amounts to a 2 per cent appreciation of the renminbi.

The reform is "in the interests of the country's long-term, fundamental interests," the central bank said in a separate statement.

Pursuing a more flexible, market-based foreign exchange system has been on the agenda for the country's economic reform.

A more flexible exchange rate system will be important in improving the country's macro-economic adjustment system and in giving the market more influence in allocating resources, the central bank said.

In the short term, the move could have some negative effects on economic growth and employment. But the bank believes the overall benefits will outweigh any disadvantages.

The reform will alleviate the imbalance in China's foreign trade sector and spur Chinese enterprises to sharpen their competitiveness in the global market, it said. Chinese enterprises should readjust to the new situation after changes in foreign exchange rates, it said.