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Last Updated: Monday, 25 July 2005, 13:09 GMT 14:09 UK
China's yuan gains against dollar
Young girl checks her yuan note against a bigger version in Beijing
Analysts are still trying to figure out the effect of the yuan revaluation
China's yuan has gained against the US dollar in its second session of trading after currency limits were relaxed for the first time in a decade last week.

The yuan ended trading at 8.1097 against the dollar on Monday, up from its Friday close of 8.11.

Pressure had intensified on China to let the yuan appreciate as it kept the currency pegged at 8.28 per US dollar.

The US and European Union complained that it undervalued the yuan and made Chinese goods unrealistically cheap.

'The quiet American'

US diplomatic sources have been trumpeting the change in Chinese policy as a victory for US Treasury Secretary John Snow and his style of "quiet diplomacy".

However, China watchers have been more circumspect saying that the decision is the first step on a very, very long road to a more flexible currency.

People's Bank of China establishes the renminbi, or people's money, in December 1948. The currency is more commonly called the yuan.
The yuan is fixed at 2.42 to the dollar from 1953 to 1972 - the height of China's Soviet-style planned economy.
From 1978 onwards China introduces a dual track currency system. The yuan is maintained for domestic use only, while foreigners are required to use foreign exchange certificates.
China adopts current account convertibility in 1996. The yuan trades in a narrow band of 8.28 to the dollar
July 2005: China announces a shake-up in the way it values its currency. It ditches the dollar peg in favour of a basket of currencies and revalue it to 8.11 versus the dollar.

If anything, they argue that the revaluation is too little to have any real impact on the trade flows between China and more developed economies.

The US trade deficit is unlikely to shrink from its record levels simply because Beijing has tweaked its foreign exchange stance, and Chinese goods and labour costs are not going to become much more expensive.

According to analysts at Capital Economics, the real reason behind the move may be political rather than economic.

"The timing is clever," they said in a note to investors.

"By changing the peg well in advance of President Hu Jintao's visit to Washington in September, Beijing may be able to avoid giving the impression of bowing too obviously to US pressure, while still doing the bare minimum necessary to defuse trade tensions."

'Relatively weak'

Chinese officials also have been playing down the move, saying that China's economy is too fragile to absorb rapid currency-related shocks.

US news agency Bloomberg quoted China central bank policy maker Li Deshui as saying that yuan trading is unlikely to free up very quickly because of concerns that speculators will attack the currency.

"There's more than $800bn to $1 trillion of hedge funds in the world and the Chinese financial system is relatively weak," Mr Li told Bloomberg.

Even so, the move has been welcomed by politicians in Europe and the US, and there are hopes that further exchange rate flexibility will follow.

On Thursday last week, Beijing decided to uncouple the yuan from its tight peg to the US dollar by allowing it float within a narrow 0.15% band either side of a level set by a basket of currencies.

Analysts said that equates to roughly an appreciation of 2.1% against the US dollar.

Future speculation now hinges on what will happen to the trading band and whether Beijing has any plans to widen it to allow further appreciation of the yuan.

Hopes and fears after revaluation
22 Jul 05 |  Business
China launches currency shake-up
22 Jul 05 |  Business
China's economy keeps on motoring
20 Jul 05 |  Business
China says no to yuan revaluation
26 Jun 05 |  Business
US urged to be patient over China
24 Jun 05 |  Business
China denies flexible yuan claim
01 Jul 05 |  Business

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