China To Value Yuan Against Basket Of Currencies

[Catch22]

7:16am 07/21/05

China to value yuan against basket of currencies By Steve Goldstein

LONDON (MarketWatch) -- The People's Bank of China said it'll dropping its yuan-dollar peg in favor of one vs. a basket of currencies. The daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%, while the trading prices of non-U.S. dollar currencies will be allowed to move in yet-to-be announced bands. "The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies," it said.

[lordshine]

Hello. About time I started typing on HPC - as I usually just read with interest. I am paid in UAE Dirhams (pegged to the dollar) but am trying to be clever whilst saving for a house-deposit so that I can buy a house for me and my wife when we return to the UK. I have an offshore account in which I am keeping my cash in a mixture of USD and GBP. Hence my interest in where the USD/GBP exchange rate is going.

Implications of the reform of the RMB (Chinese Yuan) exchange rate regime:

1. The PBOC have given themselves maximum flexibility, as the composition of the basket is unknown, and we do not know whether they intend to maintain stability against this basket for a protracted period, though this must be the baseline assumption.

2. Because of this flexibility, the market will still be left with a fair degree of uncertainty. We will only be able to estimate the composition of the basket by observing the daily dollar prices.

3. This is USD negative initially at least as it focuses attention back on the need for FX rates to move to adjust fro current account imbalances. The market has recently been focused only on cyclical US strength and the market is probably long USD

4. It is clear that the US want to see USD/RMB lower. If the basket is managed so that USD/RMB does not fall 'enough' then US political trade pressure will resume

5. Other Asian currencies have recently become detached from the China story, though they seem likely to rally from recent levels. There is no implication for HKD , but MYR has also announced a move to a managed float exchange rate.

6. LATAM currencies will benefit from perceived links with China

Possible basket weights based on trade relationship (rounded)

USD 20%

EUR 20%

JPY 20%

HKD 10%

KRW 10%

Others 20%