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SCMP Reporter

When the central bank announced on Saturday that it was going to make the yuan's exchange rate more flexible, it wasn't enough to settle the intense debate about whether the Chinese currency would appreciate against the US dollar. 
The People's Bank of China offered further explanation yesterday, saying the yuan would not have a one-off revaluation and the daily trading band against the greenback would be unchanged.
Coming just days before President Hu Jintao's trip to a G20 summit in Toronto, Saturday's statement that Beijing would 'proceed further with reform of the yuan exchange rate regime' was widely seen as indicating China is ready to break the 23-month-old, US-dollar peg that has come under so much fire from abroad.
US lawmakers and manufacturers have criticised China for keeping the yuan undervalued to benefit its exporters. 
China has held the yuan at roughly 6.83 to the dollar since July, 2008, to shield the country from the impact of the financial crisis. For the three years before that, Beijing linked the yuan rate to a basket of currencies and gradually let the yuan rise about 21 per cent against the greenback. 
The moment China's economic recovery had consolidated would mark the time to resume the yuan rate mechanism, the central bank said. 
The central bank said using a basket of currencies was more scientific and reasonable than pegging to the US dollar. 
However, economists are divided on how the yuan rate will move against the US dollar as the reform is resumed. 
'The yuan rate will rely more on the basket of currencies, which is like an automatic adjustment mechanism. If the European debt crisis does not improve and the euro and other major currencies continue to depreciate against the US dollar, the yuan is likely to depreciate too. If the euro advances, the yuan is also likely to appreciate,' Ha Jiming, an economist with Beijing-based investment bank China International Capital Corp, said. 
But Chinese Academy of Social Sciences (CASS) Zhang Ming said China would not take the reference to a basket of currencies too seriously. 
'The nominal exchange rate of the yuan against the dollar is extremely sensitive now. The central bank will not allow the yuan to depreciate against the dollar in the near future,' Zhang said. 
'At the same time, the Chinese government's tolerance to yuan appreciation is limited, because the yuan effective rate has been appreciating since this year as the trade surplus's share in China's gross domestic product has been declining. I believe the yuan will appreciate three to five per cent against the dollar this year.' 
Goldman Sachs economists Qiao Hong and Yu Song wrote in a research note that the most likely scenario was for the yuan to return to a crawling peg against the dollar. 
'The appreciation will likely take place through downward movements in central parity rates as well as during intra-day trading,' the economists wrote. 
They maintained their forecast for the three-month exchange rate at 6.74 yuan per dollar, the six-month rate at 6.66 and 12-month rate at 6.49. 
CASS's Zhang said: 'Although the central bank announced the resumption of the exchange rate reform, external pressure pushing for yuan appreciation will not ease. The yuan value increase and appreciation pace will become the main theme of the yuan exchange rate debate.'
Beijing's gradual path to reform
1988 China sets up semi-official currency swap centres  to allow  yuan trade  at a rate that more closely reflects market demand.
Jan 1, 1994 Official and swap centre rates unified, devaluing the yuan by 33 per cent  to 8.7 to the US dollar. 
April 1994  First interbank currency market set up in Shanghai. The central bank intervenes in the market to keep the yuan stable.
Dec 1, 1996 China allows the yuan to be fully convertible under the current account.
1994-96 The yuan rises from 8.7 to the dollar to  8.28.
1997-99 China wins wide praise for keeping the yuan stable during the Asian financial crisis. 
2000 The yuan is allowed to close  just outside its 30-basis-point band, which is later widened  to 8.2760-8.2800 against the dollar.
Dec 2001 China joins the World Trade Organisation and pledges to adjust its currency regime gradually.
2003  Pressure  mounts for the yuan to appreciate to help balance global trade.  
Dec 8, 2004  Beijing says China will move gradually to a flexible currency regime.
July 21, 2005 Yuan revalued by 2.1 per cent  to 'a managed floating exchange rate'. 
July 2008  Central bank  pegs the yuan against the dollar to 6.83 to tackle financial crisis.  
June 2010  Beijing says it  will resume reform of the yuan exchange rate and increase currency flexibility.



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