China Loosening Currency Peg - Update: Never Mind?

China's central bank announced over the weekend that it will gradually loosen their currency from its tie to the dollar (but see note below). China said they will allow the currency to appreciate, saying that their economy is recovering. This appreciation will encourage Chinese consumers to boost consumption and is good for American manufacturing and other exports.

In its statement on Saturday about making the yuan more flexible, China's central bank noted that the global economy was gradually recovering and added: "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability."

In addition, China's announcement to make the yuan more flexible spurred investors to bet that such a move will lift sales at U.S. multinationals over the long term.

Asian stock markets rose on the news, while US Treasury bills fell, meaning the interest rate rose on a vote of confidence in the world economy. Interest rates also rose because the method of Chinese currency manipulation had been to purchase US Treasury bills. Oil prices also rose.

The Yuan immediately rose the most in 18 months.

The currency advanced 0.21 percent to 6.8120 per dollar as of 11:31 a.m., the biggest gain since Dec. 30, 2008, according to the China Foreign Exchange Trading System. The 12-month non- deliverable yuan forward rose 1.3 percent to 6.6235 per dollar, implying traders are betting on a 2.8 percent appreciation.

A stronger yuan will help curb inflation in the world’s third-largest economy and shift investment toward service industries from export-manufacturing, the People’s Bank of China said yesterday.

Not that this expectation of a 2.8% increase is a long way from economist estimates that the currency is as much as 40% undervalued. But the appreciation needs to be gradual because the level of imbalance is so great. A gradual increase prevents American interest rates from jumping too fast, and unemployment from surging in China.

However, U.S. Senator Schumer Says China Retreating From Pledge on Yuan,

U.S. Senator Charles Schumer said China is retreating from a pledge to end the yuan’s fixed rate to the dollar and that he plans to advance trade-sanctions legislation.
“Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” Schumer, a New York Democrat, said today in an e-mailed statement. “We intend to move forward as quickly as possible with legislation.”

Update - Never mind? William Mallard at the Wall Street Journal this morning,

Adding a twist to the surprise, Beijing unshackled the yuan from the dollar in a Saturday night announcement and then pegged its currency smack in the same place against the greenback Monday morning.

. . . Setting the yuan's central parity rate at 6.8275 to the dollar Monday, the same as Friday's fixing, neatly whacked early-morning speculators who had piled into trades that bought all manner of Asian currencies against the dollar.

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