The Chinese yuan surged by the largest amount today since its landmark revaluation in 2005 following an announcement by Chinese authorities over the weekend that it would allow greater flexibility in exchange rates. The yuan rose 0.42% to 6.7976 vs. the dollar in the largest 1 day gain and highest close in 5 years. The move ahead of this weekend's G20 summit is widely viewed as a measure to head off criticism that the yuan is undervalued. The yuan's appreciation caught markets offguard, sending other Asian currencies up sharply. The Peoples Bank statement appears below:

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.

Excerpt from Bloomberg news:

The yuan rose the most since a July 2005 revaluation and forwards jumped after China's central bank ended a two-year peg before a Group of 20 summit this week. The currency advanced 0.42 percent to 6.7971 per dollar at the time of writing, the biggest gain since July 2005. The 12- month non- deliverable yuan forward rose 1.1 percent to 6.6425, implying traders are betting on a 2.3 percent appreciation. Asian currencies gained, with South Korea's won strengthening 2.6 percent to 1,171.95 versus the greenback and the Taiwan dollar climbing 0.6 percent to NT$31.999. The MSCI Asia Pacific Index of regional stocks jumped 2.4 percent and oil

rose 1.7 percent on speculation a stronger yuan will boost the purchasing power of the world's most-populous nation. China's government bonds gained and stocks rose. Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis. The currency appreciated 21 percent in the three years after a managed float against a basket of currencies was introduced in 2005. Gains this time around may be more moderate because the yuan has already strengthened 16 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation's largest market.

The People's Bank set its daily yuan reference rate unchanged at 6.8275. The currency is allowed to fluctuate up to 0.5 percent from the official rate. The central bank, which has accumulated $2.4 trillion in reserves by intervening in currency markets, said over the weekend it will allow greater currency flexibility, while maintaining the trading band, curbing inflows of short-term speculative capital and preventing excessive fluctuations.

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