Stable exchange rate matters
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The People's Bank of China's unexpected announcement Saturday on the yuan's exchange rate does not mean major reforms are coming soon to the country's currency exchange rate regime.
In a lengthy statement ahead of the G-20 summit, due to be convened in Toronto, Canada, at the end of this month, the country's central bank said it will further push for the reform of the renminbi exchange rate formation mechanism and increase its flexibility at a time when the global economy is well on the way to recovery and the Chinese economy is on a sound footing.
China's decision to revamp the renminbi exchange rate regime should focus on reforming the rate formation mechanism and should proceed in line with supply-demand principles.
The country should implement a "dynamic management and adjustment" system for the yuan's exchange rate given the fact that there is no basis for drastic fluctuations or changes to its value.
Saturday's news has sparked strong reactions and speculation both at home and abroad, with some analysts believing the move symbolizes Beijing will resume the disrupted process of exchange rate reform launched in mid-2005.
Some also believe the adoption of a flexible rate signals the start of the yuan's appreciation and the country's substantial steps towards adjusting its exchange rate policy under pressure from the United States.
However, the latest statement by China's monetary authority is only a reaffirmation of the country's basic principles on the currency's exchange rate since reforms were launched on July 21, 2005 and its willingness to shift from the yuan's peg to the US dollar, a move the country adopted in mid-2008 in the wake of the global financial tsunami.
No in-depth studies have so far been conducted on the impact that the reform of the renminbi exchange rate has caused on the Chinese economy over the past years, but one thing is sure - the drastic decline of China's exports from the second half of 2007 through 2008 and the bankruptcy of a number of domestic enterprises, export-reliant ones in particular, were largely caused by a fast rise in yuan's value.
Therefore, the country should ponder over the reasons underlying its economic downturn that emerged in the second half of 2008 and should not rush to embrace those policies it adopted since July 2005 regarding the yuan's exchange rate.
The central bank's latest stance does not necessarily foreshadow yuan's revaluation. A flexible exchange rate of the yuan leaves the possibility of both appreciation and depreciation, in which market elements will exercise the largest say in deciding which tendency should dominate.
The reform of the yuan's exchange rate formation mechanism is a key effort by China to reform the renminbi rate regime.
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