China to make its yuan exchange rate more flexible

China's central bank said yesterday it would make its yuan exchange rate more flexible, an indication analysts said that Beijing was ready to scrap the dollar peg and allow the currency to rise.

However, the People's Bank of China said there were no grounds for "large swings" in the currency, suggesting policymakers would maintain their tight grip on the value of the yuan.

The announcement was welcomed by US Treasury Secretary Timothy Geithner, who said the move would make a "positive contribution" to global growth once implemented.

IMF chief Dominique Strauss-Kahn said it was a "very welcomed" announcement that would help Chinese households and consumers.

The statement by the central bank was released amid pressure on Beijing to strengthen its currency and comes ahead of next week's G20 nations meeting in Toronto, where the controversial policy is expected to be on the agenda.

"China's central bank has decided to further promote the reform of the RMB (yuan) exchange rate mechanism, and strengthen the flexibility of the RMB exchange rate," the central bank said on its website.

However, it stressed that there was no basis for large movements or change in the exchange rate and reiterated that it would continue to manage the floating exchange rate "within the band already announced".

Central bank adviser Li Daokui said the statement marked an end to the fixed exchange rate but added he had no idea when the trading band would be widened, Dow Jones Newswires reported.

The move to increase the flexibility of the exchange rate was China's own decision and had no direct connection with the G20 summit, said Li, a member of the central bank's monetary policy committee.

Analysts said the statement suggested the government was moving away from the financial crisis exchange rate policy of effectively freezing the yuan against the dollar, which critics say gives China's exports an unfair trade advantage.

"I think they are saying this is the basic end of the de facto peg and they will be moving back to the 2005 system and this will mean gradual appreciation over time," said a Beijing-based analyst who declined to be named.