China Drops Fixed Currency Peg

The People’s Bank of China has announced a sudden change in its currency valuation policy, canceling a fixed peg to the U.S. dollar that had been in place since 1996.

In an announcement posted on the China News Daily Web site, the bank also announced an instant revaluation of China’s yuan (also known as the renminbi) to 12.33 cents, up from its former value of 12.08 cents.

Fluctuations will be carefully managed by the People’s Bank of China, which says, “The daily trading price of the U.S. dollar against the renminbi in the inter-bank foreign exchange market will continue to be allowed to float with a band of 0.3 percent around the central parity published by the People’s Bank of China.”

Western bankers are regarding the announcement as the start of a gradual process, but one that could soon affect export and import flows. “Export volumes will come down; import volumes will pick up. It will help reduce trade tensions,” one JPMorgan Chase & Co. banker told the Associated Press.

The Bush Administration also expressed approval of the announcement. A statement from Treasury Secretary John Snow called the announcement “welcome” and “important for China and the international financial system.”

Presidential spokesperson Scott McClellan has remarked, “We are encouraged by China's announcement today that they are adopting a more flexible market-based currency system.”

The fixed peg of the yuan has been unpopular with many U.S. manufacturers in recent years, as they have seen it as providing artificially low operating costs for Chinese competitors.

Recyclers represent some of the largest exporters to China already, but stronger buying power for Chinese scrap consumers could further boost demand for scrap metal, paper and plastic heading to China.