China Daily Exclusive

Currency confusion needs to be cleared

(China Daily)
Updated: 2010-06-26 15:49

The de-pegging of the yuan to the US dollar last week has created a misunderstanding that has to be cleared.

First, the central bank's announcement should be seen as an important step toward a more flexible exchange rate, and not as a significant revaluation of the yuan. In fact, there will be no one-off revaluation of the yuan.

The announcement is only a reaffirmation of the exchange rate principles China has been following since July 2005, when the yuan was first de-pegged to the greenback. The yuan was re-pegged to the dollar in mid-2008, but only to tide over the global financial crisis. China will stick to its policy of de-pegging the yuan to the dollar.

The decision is a move to make the yuan more global, in line with China's economic position in the world, rather than an effort to ward off pressure from the US and other countries.

Second, the yuan's revaluation cannot lead to balanced bilateral trade or help the US solve its problems of unemployment, over-consumption and a low savings rate. Figures show that neither the yuan's nor the dollar's exchange rate has any significant relation to the Sino-US trade imbalance.

The yuan had risen by 21.24 percent against the dollar by the first quarter of this year since July 2005, according to a World Bank report. But that didn't help the US to cut its import deficit much.

Globalization of production, along with US restrictions on hi-tech export to China, is the main reason for the trade imbalance.

It is the sovereign right of a country to decide the value of its currency. And it should not change to suit another country's need.