China indicates it will allow yuan to strengthen

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Image caption,
Critics of China say the cheap yuan is giving exporters an unfair advantage

China has indicated it will allow the yuan to rise against the dollar and other Western currencies.

The Chinese central bank announced it would make its exchange rate mechanism "more flexible", but it gave no details about the timing or extent of changes.

The yuan has been effectively pegged to the dollar, drawing criticism that China was protecting its exporters.

US President Barack Obama and the head of the International Monetary Fund (IMF) welcomed China's announcement.

The US had been particularly critical of Beijing, accusing it of keeping its currency artificially weak.

The yuan has been held at about 6.83 to the dollar since July 2008.

The Central Bank said the proposed exchange rate reform had been made possible by the global recovery.

But it appeared to rule out a major appreciation, saying there was "no basis for big fluctuations or changes".

The BBC's Damien Grammaticas says the announcement may be seen as an attempt to preempt criticism of China's currency policies at a summit of the G20 group of industrialised and developing countries next week in Canada, where Mr Obama will meet China's President Hu Jintao.

IMF chief Dominique Strauss-Kahn said the Chinese move was "a very welcome development".

Mr Obama said: "China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy."

Under pressure

The US and the IMF say the yuan is undervalued, which helps Chinese firms compete overseas and contributes to the large surplus in China's international trade.

China has kept the currency from rising by selling yuan for dollars and has built up massive foreign exchange reserves as a result.

The way China invested those reserves is seen by many economists as a key factor in the recent international financial crisis.

In April, the US treasury delayed a report that could label China a currency manipulator, in what was seen as an attempt to give Beijing time to reform its currency without appearing to do so under pressure.

A number of members of the US Congress believe the low yuan is directly affecting their local economies.

Reponding to the announcement, Senator Charles Schumer - one of the main congressional critics of China - said: "Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules."

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