China reveals currency basket for yuan peg

[Paciente]

10 Aug 2005 14:29 GMT


China reveals currency basket for yuan peg


CHICAGO (AFX) - China on Wednesday provided additional details on the currency basket it has adopted to replace the rigid decade-old dollar peg.

The primary currencies in the basket will be the U.S. dollar, euro, Japanese yen and Korean won, according to a statement on the People's Bank of China Web site.

But also featured are the currencies of some of China's other trading partners, Singapore, the U.K., Malaysia, Russia, Australia, Thailand, and Canada.

Central bank governor Zhou Xiaochuan made the following remarks:

"Current account is a major component of China's balance of payments, whereas trade in goods and services is the predominant item of current account. The current situation in China shows that trade in goods and services dominates current account balance. Therefore, the shares of trade are the major considerations in the determination of the currency components of the basket.

China's major trading partners are the United States, the Euro states, Japan, Korea, etc., and naturally, U.S. dollar, euro, Japanese yen and Korean won become major currencies of the basket.

In addition, China also trades significantly with Singapore, UK, Malaysia, Russia, Australia, Thailand, and Canada, currencies of these countries are also important in determining China's RMB [yuan] exchange rate.

Generally speaking, annual bilateral trade volume in excess of US$10 billion is not negligible in weight assignment, whereas that exceeding US$5 billion should also be considered as a significant factor in currency-weight deliberation.

When you look at currencies used in trade settlement, although some countries and regions prefer US dollar as the currency for trade settlement with China, this situation is changing gradually and trade settlement in local currencies are increasingly the choice of trading partners.

Moreover, we encourage this development.

Since the basket represents currencies of countries covering a significant share of China's external trade, the RMB exchange rate against a basket of currencies is therefore a better indicator of the value of RMB and the changes in China's terms of trade than that against the U.S. dollar, and consequently serves as an important reference in achieving basic trade balance in goods and services."

[Paciente]

China Says Dollar, Euro, Yen, Won Are in Yuan Basket


Aug. 10 (Bloomberg) -- China's central bank said the dollar, euro, yen and South Korean won are the main components of the currency basket it uses to manage its new exchange-rate regime.

The central bank is seeking to clarify how the system works without revealing the weights of currencies against which the yuan is linked. Such information would help investors guess at what levels the bank may buy or sell the yuan to stem gains or losses.

``The choice of currencies and their weights in the basket is based on the importance of China's trading partners, including countries and regions,'' Central Bank Governor Zhou Xiaochuan said in the text of a speech delivered in Shanghai today.

Other currencies in the basket include the Singapore dollar, British pound, Malaysian ringgit, Australian dollar, Russian ruble, Thai baht and Canadian dollar, Zhou said. The list excludes the currencies of Hong Kong and Taiwan, which China's government marks as its fourth and seventh largest trading partners respectively.

``There is still no indication of the weighting of the currencies in the basket,'' said Stephen Green, a Shanghai-based economist with Standard Chartered Bank. ``The currencies in the basket come as no surprise. It reflects what Chinese traders mainly invoice in.''

Export figures suggest the U.S. dollar would make up about 30 percent of the basket, the euro 20 percent and the yen 20 percent, Green said.


Main Trade Partners

China's main trading partners last year in descending order of total value of trade were the European Union, U.S., Japan, Hong Kong, the ASEAN bloc, South Korea, Taiwan, Russia, Australia and Canada, according to the commerce ministry's Web site.

``Those with annual trade volume of more than $10 billion are very important, and those with volume above $5 billion can't be neglected either,'' Zhou said in today's speech.

The central bank allowed the yuan to rise 2.1 percent against the dollar on July 21, ending a decade-old peg of about 8.3 to the U.S. currency. It is under pressure from U.S. lawmakers to let the yuan strengthen further to help curb a trade surplus that Chinese government projections show may top $80 billion this year.

``China isn't giving away anything to indicate if the yuan will be revalued at the end of the year,'' said Green at Standard Chartered. ``This is part of the puzzle.''

The central bank said the weightings of currencies in its basket will also be based on the composition of China's foreign debt, which amounted to $228.6 billion as of December 2004, and the $560 billion of foreign direct investment it has received.


Weighting Estimate

Li Huiyou, an economist at Shanghai-based Shenyin Wanguo Securities Co., said his brokerage estimates the U.S. dollar will account for 40 percent to 50 percent of the yuan basket, the euro about 20 percent and the yen 10 percent.

The People's Bank of China said in a July 29 statement that it would provide investors with some ``technical'' details of how the basket operates to clear up confusion among investors. The yuan is a denomination of the renminbi, China's currency.

The Association of South East Asian Nations includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Phillipines, Singapore, Thailand and Vietnam.