China said on Wednesday it will consider major currencies in guiding the yuan, suggesting a departure from an effective dollar peg that has been in place since the middle of last year.
The reference to a new set of benchmarks for determining the value of the yuan holds out the possibility of a departure from recent practice, which has seen the currency held steady since mid-2008 around 6.83 per dollar.
Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism, the central bank said in a 46-page monetary policy report.
It was the first time since the landmark revaluation and launching of forex reforms in July 2005 that the People's Bank of China has strayed from the language of keeping the yuan basically stable at a reasonable and balanced level when discussing future forex reforms in such quarterly reports.
The comments come ahead of a visit to China next week by U.S. President Barack Obama, and amid growing pressure from other countries for Beijing to be more flexible in how it handles the yuan in the face of dollar weakness.
Ding Zhijie, a professor with the University of International Business and Economics in Beijing, who also provides advice to government, said the change in wording shows that Beijing is ready to end the de-facto peg to the dollar in place since mid-2008.
The exchange rate policy in the last year can be viewed as an extraordinary policy for an extraordinary time, Ding said. Now, it is time to bring closure to it.
Ding added that the central bank would also continue to reform the yuan to make the yuan exchange rate more flexible.
In the short term, given consideration to international pressures and economic fundamentals, it means the yuan will get stronger, Ding said.
When Beijing launched its forex reforms in 2005, it said it would set the yuan's value in reference to a basket of currencies.
Authorities let it strengthen by about 19 percent through mid-2008, but it has kept a tight rein on the currency ever since, as the impact of the global financial crisis started to hit the Chinese economy.
However, Niu Li, senior researcher at the State Information Center, a key government think-tank, said he did not think the statement marked a drastic departure from current policy on the yuan.
What is a bit new here is the singling out of two factors from various considerations: global capital flows and other major currency movements, Niu said.
In sum, this is not an earth-shaking policy change, but a stress of policy consideration.
The yuan was flat against the dollar on Wednesday after economic data that showed factory output growth surged to a 19-month high in October, suggesting the world's third-largest economy has firmly put the worst of the global financial crisis behind it.
Both imports and exports fell more than expected in October, highlighting the continuing challenges from the global crisis.
In its report, the central bank said it expected to see continued impact from falling external demand.
It added in its report that it would stick to its loose monetary policy stance and keep sufficient liquidity in the banking system.
(Reporting by Zhou Xin, Aileen Wang, Jason Subler and Eadie Chen; Editing by Ken Wills and Neil Fullick)