China relaxes yuan policy

After repeated calls from U.S. and European leaders, China has agreed to loosen the fluctuation restrictions of the yuan relative to the U.S. dollar.

On Aug. 9, the Central Bank of China decided to allow more flexibility in the yuan, also known as the renminbi.

The currency had been pegged to the U.S. dollar for years before China decided to adopt a “managed float” policy, meaning the value of the yuan would fluctuate, but only in a range and at the discretion of the Chinese government.

The relaxed guidelines led to a 0.24-percent yuan gain against the dollar on Aug. 16, the largest gain since the pegging policy ended in July 2005.

U.S. politicians and business leaders have been critical of the Chinese government for being too conservative with the yuan policy, which they claim has led to a surplus of low priced Chinese imports.

The Chinese government sets a baseline (based on prices from specific large lenders) for the currency every morning against the U.S. dollar, euro, and yen, then allows a fluctuation of up to 0.3 percent for the day for the dollar (slightly more for the euro and yen). However, for the first six months of 2006, the average daily movement against the greenback was only 0.04 percent.

Still, if the increased flexibility produces daily movement in the 0.25-percent range, there is a possibility the Chinese government will increase the 0.3-percent daily limit.

U.S. legislators had threatened to impose a high duty tax on Chinese imports had China not shown more flexibility in its currency. Regardless, economists believe yuan appreciation could help slow down the Chinese economy, which is growing at a fast rate and is an inflation candidate.