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China: Caution is key for PBoC

China opens door to currency flexibility; ‘No need for major revaluation’

The value of the yuan might go down as well as up. That was the message from the People’s Bank of China when it announced last month that it was removing the dollar peg adopted in 2008 as an anti-crisis measure and returning to a managed float against a trade-weighted basket of currencies. To emphasize the point, on the first day of the new regime the PBoC left the reference rate unchanged at 6.8275 before allowing a series of small appreciations in the following week.

In part, the PBoC’s emphasis on currency "flexibility" might have been intended to discourage hot money inflows by making it clear that yuan appreciation is not a one-way bet. Yet the central bank also implicitly rejected calls by US policymakers for a revaluation of the currency. "With the balance of payments account moving closer to equilibrium, the basis for large-scale appreciation of the yuan exchange rate does not exist," it said.

Many analysts disagree, quoting figures as high as 50% for the undervaluation of the yuan. Others, however, endorse the central bank’s assessment. "The Chinese trade surplus has declined continuously over the past two years," says Frederic Neumann, co-head of Asian economic research at HSBC.

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