China abolishes yuan-dollar peg, adopts floating rate
By Xu Binglan (China Daily)
Updated: 2005-07-21 19:37

A more flexible exchange rate system will be important in improving the country's macro-economic adjustment system and in giving the market more influence in allocating resources, the central bank said.

This file photo shows a woman holding a sheaf of Chinese 100 yuan notes. [AFP]

In the short term, the move could have some negative effects on economic growth and employment. But the bank believes the overall benefits will outweigh any disadvantages.

The reform will alleviate the imbalance in China's foreign trade sector and spur Chinese enterprises to sharpen their competitiveness in the global market, it said. Chinese enterprises should readjust to the new situation after changes in foreign exchange rates, it said.

The central bank said it is a relativley good time for reform of the renminbi exchange rate mechanism as the Chinese economy has been growing rapidly.

The US dollar's exchange rate with the renminbi will be allowed to fluctuate by 0.3 per cent in the foreign exchange market. Fluctuation of other foreign currencies' rates towards the renminbi will also be limited within certain ranges.

The central bank would adjust fluctuating ranges according to the development of the foreign exchange market and the economic and financial situation, it said.

The central bank said it wants the yuan's exchange rate to be "basically stable on a reasonable equilibrium."

"Big swings in the renminbi's exchange rate will pose big impacts on the country's economic and financial stability."

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