An employee packs bundles of Renminbi banknotes at a branch of Bank of China in Hefei, Anhui province February 8, 2010.
BEIJING/WASHINGTON(Reuters) - China said on Saturday it would gradually make the yuanmore flexible, in a gesture that may deflect foreign criticism at nextweek's G20 summit but will not quickly yield a big move by its currency.
China
PresidentBarack Obama, who prodded China over the yuan in a letter released onFriday, welcomed the news in an indication the danger of amarket-roiling confrontation at the Group of 20 meeting in Canada hadeased.
\"China's decision toincrease the flexibility of its exchange rate is a constructive stepthat can help safeguard the recovery and contribute to a more balancedglobal economy,\" Obama said in a statement.
OtherWestern leaders and the International Monetary Fund also voicedencouragement that an important strategic ally was making a concessionwhich improves the chances of success at the June 26-27 summit.
Butthe announcement by China's central bank, which strongly suggested itwas ready to break the currency's 23-month-old dollar peg, wasconditioned by an explicit warning ruling out a one-off revaluation ormajor yuan appreciation.
\"The basis for large-scale appreciation of the RMB exchange rate does not exist,\" the People's Bank of China said.
The yuan is also known as the renminbi, or RMB.
Analystswere broadly positive about the news but cautioned that China, thelargest holder of U.S. sovereign debt, may reduce its demand for thosesecurities in the future. China buys U.S. bonds to manage the yuan'speg to the dollar, and greater currency flexibility may dilute thatnecessity.
The peg, which Beijingdefended as a source of stability during the recent global financialcrisis, has come under intense criticism from abroad as China's exportjuggernaut roared back to life.
Muchof the rest of the global economy remains sluggish and beset byunemployment in the wake of the financial crisis, and China's policy isseen as stealing jobs from foreign markets.
Inparticular, by keeping the yuan artificially cheap against the dollar,China makes its imports more attractive for U.S. consumers while makingU.S. exports to China more costly.
Thathas contributed to a massive surplus in China's trade account with theUnited States, sparking protests that the policy is at the directexpense of American jobs.
TRADE WAR
U.S.patience with Beijing over the yuan has worn thin and lawmakersthreaten to penalize it for a strategy they say is unfair and breaksthe rules.
Democratic SenatorCharles Schumer, a leading critic, said China's statement was too vagueand pledged to press ahead with legal action to raise trade barriers.
TreasurySecretary Timothy Geithner, who has delayed publication of apotentially embarrassing report that could cite China as a currencymanipulator, also stressed that China's actions would speak louder thanwords.
\"This is an important step but the test is how far and how fast they let the currency appreciate,\" he said.
The currency report, due on April 15, was put on the back-burner until after the G20 to give China time to act.
Obama needs China's help on a range of other delicate issues, including sanctions against Iran and North Korea for their nuclear programs.
Buthe must balance quiet diplomacy against an urgent domestic politicalneed to be seen fighting China for U.S. jobs before congressionalelections in November.
U.S.businesses must also tread softly with China. Caterpillar Inc, whichsells billions of dollars of earthmoving equipment and other productsto China each year, said it was heartened by the decision.
BUBBLE TROUBLE
G20 leaders have promised to tackle so-called global macro imbalances, posed by massive trade surpluses and deficits.
Those are blamed for fostering a bubble in the U.S. housing marketin 2008, and contributing to the recent European sovereign debt crisis.Economists say such imbalances are not sustainable in the long term,and warn they may trigger another damaging global financial crisis ifinvestors take fright.
Beijing'srecent insistence that the summit was the wrong place to talk aboutyuan flexibility could have overshadowed the meeting and damaged trust.China reduced that risk with Saturday's announcement.
\"Thisis an important move as it signals recognition by Chinese officialsthat a more flexible exchange rate is in China's own interest and alsoacknowledges its responsibility to the international community,\" saidEswar Prasad, a former head of the International Monetary Fund's Chinadivision.
China has long said itwould not bow to international pressure over its currency, and thecentral bank went out of its way to dampen expectations for any bigyuan rise.
\"We believe this is apositive gesture, suggesting the yuan will soon resume its appreciationagainst the dollar,\" said Goldman Sachs economists Yu Song and HelenQiao.
The news could also easefears of a trade dispute between the United States and China at adelicate time for the world economy and may propel world stocks marketshigher on Monday.
It was clearthat China intended its announcement -- published in English at aroundthe same time as Chinese, a departure from usual practice -- to markthe end of the yuan's de facto peg to the dollar. That had beendefended as a special protection policy during the global financialcrisis.
\"The global economy isgradually recovering. The recovery and upturn of the Chinese economyhas become more solid with enhanced economic stability,\" the Chinesecentral bank said in a statement on its website.
\"Itis desirable to proceed further with reform of RMB exchange rate regimeand increase the RMB exchange rate flexibility,\" it said.
Chinahas held the yuan at roughly 6.83 to the dollar since July 2008 in anattempt to insulate the fastest-growing major economy from the turmoilsparked by the U.S. credit crunch.
(Additional reporting by Phil Smith, Lu Jianxin and Zhou Xin, David Lawder, Andy Sullivan, Emily Kaiser and Lesley Wroughton in Washington, James Kelleher in Chicago; Writing by Simon Rabinovitch and Alister Bull; Editing by Neil Fullick, Kristin Roberts and Peter Cooney)
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