China to liberalize yuan, as country posts largest trade deficit in at least 10 years

The Chinese central bank has indicated that it will give the country’s national currency some room to fluctuate on the free market, contrary to its long-standing practice of keeping the value of the yuan down to encourage foreign investment and a steady flow of exports.

“We will allow and encourage market forces to play a bigger role, and the central bank’s participation and intervention in the market will decrease in an orderly manner,” said People’s Bank of China Governor Zhou Xiaochuan Zhou, quoted by Reuters.

The announcement comes after several Chinese jurisdictions were allowed to experiment with a more liberalized yuan over the past three years. According to the Wall Street Journal, the move is seen as part of an effort to establish the yuan as a legitimate currency in global trade and investment.

The move is interesting in light of last week’s revelation that China posted its largest trade deficit in at least a decade in February. Chinese imports surged to a value of US$31.5 billion, up 39.6 per cent over last year, while exports rose 18.4 per cent. Since China’s massive economic growth has been largely spurred by manufacturing and exports, this may be a sign that the rapid expansion of the past decade is losing a bit of its momentum. The GDP growth forecast for 2012 is pegged at 7.5 per cent, the lowest target since 2004.

Despite this, the central bank’s decision to liberalize the yuan may be a sign of confidence in the economy. If domestic demand can pick up in China, slowing exports might not be so bad.



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