By Beijing Bureau Chief
NBC News
updated 7/21/2005 3:11:32 PM ET 2005-07-21T19:11:32

Amidst growing international pressure China’s central bank announced a significant step to reform its foreign exchange regime Thursday, scrapping its currency’s peg to the dollar and revaluing it for the first time in nearly a decade.

“From today, the renminbi rate against the U.S. dollar will appreciate by two percent,” said the People’s Bank of China on its Web site late Thursday.

The much-awaited Chinese currency move comes ahead of the landmark visit of President Hu Jintao to the United States in early September and is seen as a move to ease trade frictions with the U.S. ahead of the Chinese president’s visit.

Hu will be visiting Washington, D.C., for the first time as China’s new leader against the backdrop of growing tensions over a host of issues, from military buildup to trade.

“We have some difficulties on the trade front with China, and one such difficulty is their currency,” said President Bush in a recent joint press conference with the visiting Australian prime minister.

“And we’ve worked with China to convince them that it makes sense for them to change how they value their currency,” Bush added.

“The move is certainly a friendship gesture, in response to half a year of pressure,” said a Chinese analyst who requested not to be identified, given the sensitivities of recent Chinese-American ties.

“The People’s Bank move was driven by many factors, but certainly addressing the U.S. concerns is an important motivation,” the analyst added.

U.S. criticism
China has faced increasing criticism, particularly in the United States, where many industry lobbyists and lawmakers have accused Beijing of keeping the value of its currency artificially low to sustain its trading advantages.

Last year, the U.S. incurred a trade deficit with China amounting to $164 billion — a record sum.

Some U.S. legislators have been preparing a bill that would impose a 27.5 percent punitive tariff on Chinese imports unless Beijing stops what they have decried as “currency manipulation.”

The legislative move has been delayed after Federal Reserve Board Chairman Alan Greenspan warned that the measure would be “counter-productive.” In a recent testimony, Greenspan also signaled that Beijing was ready to move with currency reform.

It remains to be seen how China’s modest move to revalue its currency can pacify many critics in the U.S. who argue that the Chinese currency is undervalued by as much as 40 percent.

Many China observers anticipate that Beijing will avoid drastic measures and only take a gradual approach to currency reform, given the fragility of its banking system and mounting domestic problems.

“China can only take steps with controllable impact, one at a time,” said one Chinese analyst.

China’s currency effectively appreciated to 8.11 against the U.S. dollar, from its peg of 8.28 that has been fixed since the Asian financial crisis in 1997.

The Chinese renminbi, or yuan, will be allowed to trade within a tight band of 0.3 percent against a basket of foreign currencies, according to the Chinese central bank’s surprise announcement Thursday, thus ending the decades-old practice of directly fixing the value of the Chinese currency to the U.S. dollar.

Eric Baculinao is an NBC News producer based in Beijing.

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