By Bondsquawk:

The Chinese Central Bank announced Saturday evening that it will proceed with exchange rate reform and allow a more flexible currency, signalling an end to the renminbi’s peg to the U.S. dollar according to an article from The New York Times.

The People’s Bank of China said that the Chinese economy was strengthening after the global financial crisis and that it was “desirable to proceed further with reform” of the currency, known as the renminbi or yuan. The announcement comes a week before world leaders gather in Canada for the Group of 20 and Group of 8 summit meetings. A growing number of countries have been calling for China to let the renminbi appreciate, including not just the United States and European nations, but India, Brazil and Singapore in recent weeks.

Details are vauge in the PBOC’s press release but more information may come this Monday as to the degree of appreciation. The New York Times added the following.

China’s announcement strongly echoed the central bank’s decision in July 2005, to begin allowing the renminbi to rise against the dollar. The renminbi then rose 21 percent over the next three years, until the central bank informally repegged the renminbi at 6.83 to the dollar in July 2008, as the international financial system and the global economy began deteriorating rapidly.

The central bank’s statement on Saturday, like the statement nearly five years earlier, said that the People’s Bank of China would set the value of the renminbi in relation to various currencies, and not just the dollar.

But in contrast with the 2005 announcement, the People’s Bank did not include any immediate appreciation of the renminbi. In 2005, the new currency policy was accompanied by a one-time, 2 percent rise in the currency against the dollar, followed by further, gradual appreciation against the dollar.

President Obama has sought a stronger renminbi as one of his central foreign policy goals. It would tend to make Chinese exports more expensive and less competitive in the American market, encouraging American consumers to buy more American goods instead.

For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the Chinese government has started to make an energetic effort to improve the standard of living of industrial workers.

According to a Bloomberg article, U.S. Treasury Secretary, Tim Geithner supported the descision.

“This is an important step, but the test will be how far and how fast they let the currency appreciate,” Geithner said in a statement today in Washington. “Vigorous implementation would make a positive contribution to strong and balanced global growth.”

Despite the praise, U.S. Senator and vice chairman of the Joine Economic Committee of Congress, Charles Schumer who suports legislation for increased tarifs on Chinese imports as a result of the two-year peg, expressed his displeasure.

“We hope the Chinese will get more specific in the next few days,” Schumer said. “If not, then for the sake of American jobs and wealth, which are hurt every day by China’s practices, we will have no choice but to move forward with our legislation.”

BondSquawk

BondSquawk is written by a team of bond market experts whose aim is to provide an unbiased view of one of the largest (but under reported asset classes in the world) – The world of bonds.

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