The governor of China's central bank, Zhou Xiaochuan, yesterday
revealed details of the basket of currencies used to determine the
value of the yuan.
Dominant among a raft of currencies are the US dollar, the euro,
the yen and South Korea's won.
The Singapore dollar, pound sterling, Malaysian ringgit, Russian
rouble, Australian dollar, Thai baht and the Canadian dollar are
also considered in the calculation, Zhou said.
Speaking at the opening of the second headquarters of the
People's Bank of China (PBC)?in Shanghai,
Zhou explained that the currencies were chosen for their share of
China's foreign trade, foreign debt and foreign direct
investment.
At the moment, the US, the EU, Japan and South Korea are China's
biggest trading partners. "Their currencies are naturally the main
ones in the basket," Zhou said.
Any economy that has an annual bilateral trade volume of more
than US$10 billion cannot be neglected in the basket, Zhou
said.
Those with an annual trade volume of more than US$5 billion
should also be considered, Zhou added.
Zhou did not give details of how individual currencies are
weighted in the basket.
On July 21, China cut the yuan's 11-year peg to the US dollar,
allowing it to move in a restricted float, that is, to rise or fall
by 0.3 percent a day against the greenback.
It also announced that a basket of currencies would determine
the exchange rate of the renminbi.
The yuan gained 2 percent against the US dollar on the day of
revaluation, and has appreciated slightly since.
The yuan closed at 8.1062 against the US dollar yesterday.
Raymond So, an associate professor with the Department of
Finance at the Chinese University of Hong Kong (CUHK), applauded the
disclosure of constituent currencies in the basket.
"It is a tactical move by the central bank to track the yuan
with the US dollar, the euro, the yen and the currencies of smaller
trading partners."
The euro and the yen are moving in a direction virtually
opposite to the US dollar, so that could provide a hedge against
wide fluctuations in the foreign currency market, So noted.
"More important, the disclosure of the currency package could
ease the pressure from China's trading partners to further revalue
the yuan as the interests of the US, the EU and Japan will be
divergent."
Chan Bo-ming, senior economist at DBS (Hong Kong), also welcomed
the disclosure but added: "The currencies included in the basket
have been anticipated by the market so the disclosure would have
almost no impact on the yuan. It will ease US pressure on China's
monetary policy."
(China Daily August 11, 2005)