Peg is dead as China vows yuan flexibility

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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 dollar peg that has come under intense fire from abroad.

The People's Bank of China all but ruled out the one-off revaluation or major appreciation hoped for by critics, saying there was "no basis for big fluctuations or changes" in the exchange rate.

However, it was clear that China intended its announcement -- published in English at around the same time as Chinese, a departure from usual practice -- to mark the end of the yuan's de facto peg to the dollar, which it had defended as a "special policy" to protect its economy from the global financial crisis.

Whether the announcement will be enough to placate critics, especially US lawmakers who say an undervalued currency gives China an unfair trade advantage, remains to be seen.

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability," the Chinese central bank said in a statement on its website.

"It is desirable to proceed further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility," it said. The yuan is also know as the renminbi, or RMB.

In practice, this is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.

Initial movements will probably be small, but cumulatively, it could amount to several percentage points over the next few months.

International complaints about China's exchange rate policy had died down in recent months as the European sovereign debt crisis became the dominant concern, but in recent days pressure had begun to mount again.

A group of US lawmakers, led by Senator Charles Schumer, were pushing for a bill that would allow the United States to use countervailing duties against countries with "fundamentally misaligned" exchange rates.

And the yuan was threatening to be the elephant in the room at a G20 summit in Canada on June 26 and 27. US President Barack Obama said that it was essential to global economic vitality that countries adopt market-oriented exchange rates, but a series of Chinese officials said the yuan was China's sovereign concern and should not be discussed in international circles.

China has held the yuan at roughly 6.83 to the dollar since July 2008 in an attempt to insulate the fastest-growing major economy from the ravages of the global financial crisis.

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