The yuan’s eschewal of its fixed peg to the greenback on July 21, 2005, is a milestone that shall find a place in the annals of global financial history. Albeit on a tiny scale, the revaluation has set the yuan on the course of flotation that will gradually lead to market determination of its value in the future. Therein lie the opportunities and challenges for the Dragon, Uncle Sam, the Orient and the world economy at large.
After dithering for long, the dragon has finally delivered. The event for which the entire world waited with bated breath took place on July 21, 2005, as China revalued its currency. For nearly a decade, the yuan was pegged against the US dollar at 8.28. The Peoples Bank of China (PBoC) has announced that under the new regime of managed float exchanges rate, the Chinese yuan is set at 8.11 per US dollar, a 2.1% increase in its value. The bank also linked yuan’s value to a basket of currencies of its major trading partners. Also, it will be trading in the narrow band of 0.3% either way from previous day’s closing. While Malaysia too, dropped its currency peg against the US dollar and switched to managed float against the basket of currencies as an immediate response to the move, Hong Kong and Singapore have retained their status quo.
Meanwhile, PBoC has disclosed the currencies in the currency basket, it will use to manage the yuan exchange rate. The dollar, the euro, the yen and the Korean won dominate the new currency basket. It also includes the Singapore dollar, the pound, the Malaysian ringgit, the Russian ruble, the Australian dollar, the Thai baht and the Canadian dollar. But the bank has not disclosed the other currencies in the basket and their proportions. Bank officials said the weightings have been determined “By a raft of data, including foreign trade, foreign debt and foreign direct investment from each country.” |
