MercoPress. South Atlantic News Agency

China scraps currency link to the US dollar

China, Asia's second economy behind Japan revalued Thursday its currency 2%, the first time in a decade, and will let the Yuan float against a basket of currencies.

The reform is seen as the first step towards the liberalization of China's tightly controlled currency system, a move praised by United States that has been complaining about the cheap Yuan and the surge of Chinese exports.

"I welcome China's announcement that it's adopting a more flexible exchange rate regime", said US Secretary of the Treasury John Snow, adding that "reform of China's currency regime is important for China and the world's financial system".

"This is certainly a good first step, particularly when you've had a fixed structure for over a decade", said Federal Reserve Alan Greenspan during a Congressional Banking Committee hearing.

"I think they've been cautious. But I look at it as the first step of several further adjustments as they inevitably increase their participation in world trade markets", added Mr. Greenspan.

Japan's Finance Minister Sadakazu Tanigaki described the decision as "just a beginning" forecasting the yuan will further strengthen based on the new basket system.

"We expect the currency will move further based on its basket currency system; we must closely monitor the situation", said Mr. Tanigaki who welcomed China's "swift decision" to revalue its currency.

The Yuan has been pegged at 8,28 against the dollar for over a decade and now will be strengthened by a 2,1% move to 8,11 to the dollar.

The International Monetary Fund was also quick to reply to the decision saying that "it was ready to work with authorities to fully utilise the scope of flexibility in the evolution of the new exchange rate system".

Thomas C Dawson, director of external relations at the IMF said: "The change in China's exchange rate regime announced today represents a move in the direction of greater exchange rate flexibility. Greater flexibility is very much in China's interest as it would provide more room for monetary independence enhancing the government's ability to manage the economy".

In a national broadcast Chinese authorities announced that as of Friday the yuan would be allowed to trade in a tight range of 0,3% against a basket of foreign currencies, but it did not indicate which currencies.

The move seems to have been coordinated with Malaysia which also scrapped its currency link go the US dollar.

The yuan or renminbi (people's money) was created December 1948 by the People's Bank of China. Between 1953 and 1972 the yuan was fixed at 2,42 to the US dollar, when the economy was Soviet style and centralized. Following the oil crisis of 1973, when most currencies abandoned fixed exchange rates, China adopts a dual system linked to a basket of currencies. From 2,46 to the dollar in 1973, the yuan reaches 1,50 in 1980. In 1984 the yuan is devalued to 2,30, followed by a further depreciation in 1993 when it reaches 5,80 to the US dollar. Towards the end of 1996 and early 1997, after adopting current account convertibility, the yuan trades in a narrow band of 8,28 to the US dollar where it remains until 2005.

The Chinese currency managed to survive the Asian 1997/98 financial crisis but by 2002 China's main trade partners begin complaining of the undervalued yuan and its huge trade surpluses.

More recently senior US Congressmen had threatened to impose tariffs on Chinese imports if they did not revalue the currency.