China will gradually make the yuan's exchange rate more flexible, the central bank said on Saturday, indicating that it was ready to break a 23-month-old U.S. dollar peg that has come under intense fire from abroad.
The central bank made the pledge ahead of a meeting of world leaders in the G20 forum on June 26-27, but made no mention of a one-off revaluation or major appreciation hoped for by critics.
It said there was no basis for big fluctuations or changes in the exchange rate.
JOYCE CHANG, J.P. MORGAN'S HEAD OF GLOBAL CREDIT AND EMERGING MARKETS RESEARCH:
We have been forecasting a revaluation in the second quarter so this is not a big surprise but recent statements had raised more uncertainty, Chang said.
It is a return to the pre-crisis policy of allowing the currency to move plus or minus 0.5 percent daily around the previous day's fix. It is not a one-off revaluation.
Markets will view this positively - a modest step in the right direction, even if the pace is slow, she said.
MOHAMED EL-ERIAN, CHIEF EXECUTIVE AND CO-CHIEF INVESTMENT OFFICE OF PIMCO:
The message from the Chinese authorities is that they are resuming the journey toward greater, but still measured reliance on, market-based instruments -- a journey that was interrupted by the financial crisis and that involves gradually allowing greater exchange rate flexibility.
We have been expecting the Chinese forward currency market to price in a higher probability of appreciation. Depending on the details, it may move the Chinese currency NDFs and may be viewed as neutral to supportive of risk assets.
MICHAEL CHEAH, SENIOR PORTFOLIO MANAGER FOR AIG SUNAMERICA ASSET MANAGEMENT, who just returned from a two week trip to China, where he met with politicians, think-tanks, industry executives:
Right now there's a window of opportunity for them to act at their choice of timing, without it being seen they are doing it just because the US want them to do it.
They do understand that, economically, it's not going to change the trade deficit. They know that doing it is good for the US, politically, and they know that they need to go back to pre-2007-2008 crisis trading band. It's important for them to allow their exporters to react to market forces, as every developed nation has to.
They need to move toward a much wider band in order to stop this one-way renminbi bet. Everyone thinks the renminbi will appreciate. Hard money will continue to pour in and domestic money is unwilling to pour out. That has been creating enormous liquidity problems, domestically.
MARC CHANDLER, GLOBAL HEAD OF CURRENCY STRATEGY, BROWN BROTHERS, UNITED STATES:
I am not sure what the words mean -- greater flexibility but no change in the band. And also PBOC has been among the leading advocates of greater flexibility. I think the most prudent thing to do is to take a wait-and-see stance before jumping to conclusions.
GEORGE GONCALVES, HEAD OF U.S. INTEREST RATE STRATEGY, NOMURA SECURITIES INTERNATIONAL, NEW YORK:
On Monday, if this is an early warning ahead of the G20 meeting, there should be a give back in the recent Treasury rally. You will see a parallel upward move in rates. Perhaps, the curve could even steepen.
We could push toward 3.50 percent on the 10-year Treasury note. It could cheapen the market to a new equilibrium between 3.00 to 4.00 percent.
If market prices this news before the G20 meeting, the news itself will generate more of a muted response.
The first gauge of interest on Treasuries is going to be next week's auctions. The auctions will be an assessment whether we'll see lower foreign participation in the near term.
Back in 2005, the knee-jerk reaction was a 10 to 15 basis point increase in yields. That was one of the biggest moves of the year and it continued to rise for two to three weeks thereafter.
Since 2005, China's foreign reserve in dollars continues to grow. Even with this news, this is a gradual approach and it should not be an instantaneous shock.
Based on prior experience like in 2005, they still purchase Treasuries. This will also offer some relief from the pressure on China from its trading partners.
CHRISTOPHER LOW, CHIEF ECONOMIST, FTN FINANCIAL, NEW YORK:
I expect a very quick revaluation. They don't want speculators to profit from it like back in 2005. I suspect they will announce the new level of exchange rate shortly and the market will move very quickly to those levels.
I don't think it would mean a significant change to their overall purchases of Treasuries because there will still be a peg.
The announcement came on Saturday, which is more of a reason they don't want people (speculators) to take advantage of it. Back in 2005, they were not happy with the way speculators profited from it. That caused a large inflow of capital into China and caused an overheating of its economy. It fueled the property and equity bubbles.
I expect there would be some upward move in yields on speculation on less buying. It could mean roughly less than a quarter point increase in the 10-year Treasury yield which is still significant. But it may not last very long. We'll take confirmation from the auctions that something is going on.
U.S. equities should benefit because the whole pointing of revaluation is to cool Chinese exports. But the big U.S. equipment makers may be hurt because the Chinese economy may slow.
CHRISTIAN COOPER, SENIOR RATES TRADER AT JEFFERIES & CO. IN NEW YORK:
It's certainly more of policy than of substance at this point, and that's a good thing. The last thing the market needs at this point is a sharp revaluation. This is at most some opening salvo for the Obama administration that China acknowledges it needs some increased flexibility. The question is how we get there. Even if there had been details released this is going to be a very slow, controlled process aimed at avoiding sharp fluctuations -- it's not going to mean anything on Monday.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS, WEST CHESTER, PENNSYLVANIA:
An orderly revaluation of the renminbi would be a very positive global economic development. Revaluation will help contain developing inflationary and speculative pressures in China, support stronger growth in Chinese domestic demand,
lead to more balanced trade with the United States, and help cushion the economic blow to Europe from its debt crisis.
It is surprising that that the Chinese took this step now given the heightened global financial volatility created by the European debt crisis, but it will make the upcoming G20 meeting go much more smoothly.
RICH LAVIN, CATERPILLAR GROUP PRESIDENT FOR EMERGING MARKETS:
Caterpillar is encouraged by this development, and we believe over time that a stronger Chinese currency will promote more exports from the U.S. to China. This should strengthen what is already a positive and beneficial trade relationship between the two nations.
ALBERTO BERNAL, HEAD OF RESEARCH AT BULLTICK CAPITAL MARKETS IN MIAMI:
The decision is a medium positive for the world economy. It implies that gradualness in policy implementation remains the key for China.
This will help to reduce some pressure from G20. For Latin America this is relatively positive. The move will/should (eventually) allow for Chinese salaries to increase in real terms. This implies more exports from Latin America to China, and more FDI (foreign direct investment) into Latin America from China.