Text of China's statement on loosening yuan rate

By MarketWatch
The following is the text of a People's Bank of China statement Saturday on increasing the exchange-rate flexibility of the yuan, or renminbi (RMB) currency:

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility. In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China. See this statement in English on the People's Bank of China Web site.

China's yuan move ripples across Asia

Commentary: Loosening has big implications, but currency's rise will be slow
By MarketWatch

LOS ANGELES (MarketWatch) -- When an economy the size of China's takes a step, smaller players sometimes need to scramble to avoid getting squashed underfoot.

Beijing's announcement over the weekend that it would loosen its de-facto peg to the U.S. dollar is -- on the face of it -- such a move, and one of the most obvious groups affected are foreign firms who do business in China.

Labor problems have let offshore owners of Chinese factories -- from Japan's Honda (JP:7267 2,690, -46.00, -1.68%) /quotes/comstock/13*!hmc/quotes/nls/hmc (HMC 29.75, -0.33, -1.10%) to Taiwan's Foxconn (HK:2038 5.94, +0.33, +5.88%) /quotes/comstock/11i!fxcnf (FXCNF 0.70, 0.00, 0.00%) -- to promise higher wages. If the Chinese yuan starts to march upward against other currencies, those pay raises will eat further into margins denominated in Japanese yen or Taiwan dollars.

Then there's the case of Hong Kong. A river of mainland Chinese money already flows to the former British colony, as the well-heeled buy into Hong Kong assets, especially real estate. Hong Kong's currency is firmly pegged to the U.S. dollar, so if the yuan rises, their prices will only look more attractive to the mainland's investors.

Of course, questions remain over how quickly the yuan will move against the dollar, and even what direction it will go over the medium term.

The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.

The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.

Meanwhile, some contrarians question whether the loosening necessarily means a rise in the yuan against all its rivals.

Caixin Online reported prior to the yuan announcement that the currency's real effective exchange rate (which takes currencies other than the greenback into account) rose 3.37% during May alone. This is because the effective dollar peg forced the yuan to rise against the euro, a currency that features significantly in China's trade account.

With China's trade surplus with the world having narrowed from its previously gaping width, the upward pressure on the yuan that existed some years back, when Western officials ratcheted up their calls for appreciation, is no longer as much of as a factor as it once was.

China's yuan move good for some, bad for others

China's yuan move good for some, bad for others
China airline, paper shares may rise, but Korean exporters could face pressure

By Lisa Twaronite , MarketWatch

TOKYO (MarketWatch) -- Asian equities markets rallied in the wake of China's weekend announcement that it will allow its currency to gradually move against the U.S. dollar, with some sectors seen more likely than others to benefit from the move.

China's central bank said Saturday it would loosen the yuan's de-facto peg to the dollar, while ruling out a one-time revaluation. Analysts expect the yuan to rise between 3% and 5% a year, against its U.S. counterpart. Read more on Chinese yuan move.

"We expect modestly positive reactions from the Chinese equity markets," especially airline shares, as investors price for more appreciation, said strategists at Deutsche Bank.

Chinese domestic consumption "should be the biggest beneficiary of these structural changes," they said, identifying instant noodles, dairy, tobacco and alcohol shares as "key winners."

In Hong Kong trading Monday, shares of Air China Ltd. /quotes/comstock/22h!e:753 (HK:753 8.29, +0.28, +3.50%) /quotes/comstock/11i!airy.y (AIRYY 20.77, -0.58, -2.72%) were up 3.6%, China Eastern Airlines Corp. /quotes/comstock/22h!e:670 (HK:670 3.74, +0.24, +6.86%) /quotes/comstock/11i!cheaf (CHEAF 0.40, +0.03, +8.11%) shares were up 7.1%, and China Southern Airlines Co. /quotes/comstock/22h!e:1055 (HK:1055 3.80, +0.28, +7.95%) /quotes/comstock/11i!chkif (CHKIF 0.40, 0.00, 0.00%) surged 8%. In Shanghai, Air China /quotes/comstock/28c!e:601111 (CN:601111 11.59, +0.57, +5.17%) rose 5.3%, China Eastern /quotes/comstock/28c!e:600115 (CN:600115 7.90, +0.39, +5.19%) rose 5.1% and China Southern /quotes/comstock/28c!e:600029 (CN:600029 7.18, +0.46, +6.85%) jumped 6.4%.