2010-06-22 09:44

Currency strongest in years, impact on global economy 'still unclear'

BEIJING - Stocks worldwide and oil prices rose on Monday after China's central bank pledged to make the yuan more flexible, but analysts said the policy's effect on the Chinese and global economy was still uncertain.

Chinese authorities said on Saturday it would push ahead with the yuan exchange rate mechanism reform, a move that is expected to loosen the currency's two-year-old peg to the US dollar and lead to its gradual appreciation.

The yuan subsequently surged on Monday, its highest rise in a day since a landmark revaluation in 2005.

After setting the mid-point for the day's trading range, the People's Bank of China let the currency rise 0.42 percent to 6.7976 per US dollar - both the biggest daily gain and the highest close since China revalued its currency and introduced a managed float regime five years ago.

At one point, the yuan was up by as much as 0.47 percent from the day's mid-point - below the currency's 0.5 percent limit, which has rarely been tested in practice.

World stock markets also rallied on Monday.

In Asia, Japan's benchmark Nikkei 225 stock index ended 242.99 points or 2.4 percent higher at 10,238.01 - a month-high close. South Korea's Kospi rose 1.6 percent to 1,739.68. Hong Kong's Hang Seng index climbed 3.1 percent to 20,905.91.

Benchmarks in Singapore and Taiwan also advanced.

The Chinese mainland's Shanghai Composite Index added 2.8 percent to 2,583.91.

After sharp gains in Asia, Wall Street extended its winning streak - the Dow Jones industrial average rose 89 points in morning trading and Standard & Poor's 500 index rose 7.94, or 0.71 percent, to 1,125.

Britain's FTSE 100 rose 1.0 percent to 5,304.97 and Germany's DAX was 1.4 percent higher at 6,302.45. France's CAC-40 gained 1.5 percent to 3,740.77.

The announcement on the yuan also helped the euro, pushing it to $1.2457 from $1.2364.

Similarly, crude prices rose 2 percent on the same day to their highest since early May, as China's new policy stance raised expectations of higher petroleum imports by the world's second-largest oil consumer.

The brisk market performance showed how people were pinning much hope on the role of China's new policy in rebalancing the global economy and solving its domestic economic problems, analysts said.

The American Chamber of Commerce in China welcomed the central bank's move and said in a statement that "a stronger and more market-oriented yuan will ... help reduce unsustainable global imbalances".

"In Europe, investors may have anticipated growing China imports from the continent and increasing overseas consumption by the Chinese," said Dong Yuping, senior economist with the Chinese Academy of Social Sciences.

Domestically, the policy move "should help contain inflationary pressures in the short run and rebalance the Chinese economy over the medium and long run," said Wang Qing, Chief Greater China Economist at Morgan Stanley in Hong Kong.

But the overall effect of the policy on the global and domestic economy is uncertain, analysts said.

"The overall effect is unclear since it would not alter the fundamental conditions of the world economy and could damage the domestic economy," Dong said.

The yuan appreciation would not benefit US trade with China and its jobs, as past experiences have shown, he said.

From 2005 to 2008, the yuan rose by 21 percent against the dollar, but the bilateral trade gap has not narrowed.

"The unilateral adjustment of the yuan policy would not solve the problem of global economic imbalance because it's rooted in the global division of labor," Dong said.

While it would help restructure the economy by boosting services and consumption domestically, it may also lead to job losses in the foreign trade sector.

"It remains too early ... to rush to any conclusion regarding the real overall effect of the new policy," he said.

Reuters and AP contributed to this story.