Geithner Welcomes China Exchange Rate Decision

China's central bank promised Saturday to allow more exchange rate flexibility, suggesting a possible break from the Chinese yuan's two-year peg to the U.S. dollar, but it ruled out any large-scale appreciation.

The statement posted on the website of the People's Bank of China mentioned no specific policy changes, though markets will be watched closely Monday for its effects. Chinese officials have said all along that reforms of the yuan, also known as the renminbi, or "people's money," will be gradual.

"It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility," the central bank said.

Signs that an economic recovery has taken hold prompted speculation that China would begin letting the yuan resume a gradual appreciation against the U.S. dollar that began in 2005 but was halted abruptly in 2008 as the global financial crisis took effect.

Since then, the yuan's value has remained at roughly 6.83 to $1, although it is formally pegged to a basket of currencies that includes the U.S. dollar.

The statement, timed just before President Hu Jintao's trip to the G-20 summit in Toronto, Canada, follows warnings from Beijing earlier this week against making its currency policies a main focus of the meeting.

U.S. Treasury Secretary Timothy Geithner and IMF Managing Director Dominique Strauss-Kahn quickly praised China's move.

"We welcome China's decision to increase the flexibility of its exchange rate," Geithner said in a statement issued in Washington. "Vigorous implementation would make a positive contribution to strong and balanced global growth. We look forward to continuing our work with China in the G-20 and bilaterally to strengthen the recovery."

"A stronger renminbi ... will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer," Strauss-Kahn said.

Beijing kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand. It faces pressure from the United States and other trading partners who contend the yuan is undervalued.

"It definitely sounds significant. They're saying they're going to press forward," Stephen Green, an economist at Standard Chartered Bank in Shanghai, said of Saturday's statement.

"We didn't ever think they were going to do a big one-off, so it looks like that's not going to happen," he said. "We're going to see more movement around a basically stable exchange rate until the global economy is basically healthier. The proof will be in the pudding on Monday."

Some U.S. lawmakers argue that Beijing's exchange rate policy gives Chinese exporters an unfair advantage, costing millions of American jobs.

But Chinese officials have warned that any adjustment to the exchange rate is not other countries' concern.

The director of the international department of the People's Bank of China, Zhang Tao, told a news conference Friday that Chinese leaders will not discuss the yuan at the summit.

Saturday's statement pointed to economic growth both inside and outside China as a reason for the increase in exchange rate flexibility.

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability," the central bank said.

However, it indicated no major policy changes, adding: "The exchange rate floating bands will remain the same as previously announced in the interbank foreign exchange market."