SHANGHAI--China kept the yuan's exchange rate unchanged against the dollar Monday, surprising markets after announcing over the weekend it was unhitching its de facto peg.
Underscoring its vow to move gradually in liberalizing its rigid foreign-exchange regime, the central bank set the yuan's central parity rate, an official reference level for daily trading, at 6.8275 yuan to the dollar, exactly the same as Friday's central parity rate. The fixing put the yuan slightly weaker than Friday's close in over-the-counter trading of 6.8262 yuan to the dollar.
The People's Bank of China announced Saturday that it would allow more flexibility for the yuan's exchange rate, a move widely seen as signaling it would let the yuan resume a gradual rise against the dollar. Beijing had essentially pegged the yuan to the U.S. currency since July 2008 as an emergency measure to add stability to its economy amid the worsening global financial and economic crisis.
Asian currencies had climbed early Monday on the expectation that China was about to let the yuan start rising again.
But the surprise announcement, just after 0115 GMT, that the central bank was keeping the yuan's daily reference rate unchanged caused currencies such as the Korean won to pull back from early gains.
The dollar opened lower against the yuan in China's over-the-counter market, at 6.8255 yuan each, but soon rose to 6.8268 yuan, back above Friday's close.
China's central bank, as usual, gave no explanation for Monday's central parity rate. Officially, the level is based on the weighted average of prices submitted by market makers, but in reality it's largely at the central bank's discretion.
The central bank has incentive to be unpredictable in how the yuan's value proceeds. Officials have been worried that a steady rise in the yuan's value against the dollar could attract inflows of speculative capital from investors betting on the currency's inexorable appreciation -- as happened during the three-year period from mid-2005 when the yuan gained more than 20% against the dollar. Beijing fears such that such "hot money" could disrupt its economic policies.
Chinese officials have been at pains to stress that the apparent return to a "managed float" for the yuan would mean only gradual moves. In Saturday's announcement, the central bank said there was no basis for a "large-scale appreciation" of the yuan. And officials subsequently cautioned against expecting rapid moves.
Monday's fixing--the first operational evidence of Beijing's plans--seemed designed to bolster this view.
"Given the dollar's move over the weekend, the central parity should have been set around 6.8273-6.8274 at the least," said a Shanghai-based trader at a foreign bank. "It appears the central bank is giving a signal that it will make foreign-exchange adjustments only very gradually."
In the offshore market for nondeliverable forwards, derivative products that are the prime vehicle for bets on the spot rate, the dollar rate one-year forward initially fell as low as 6.6000 yuan each, but rebounded and was quoted at 6.6360/6.6500 yuan midmorning in China.
That said, markets will now be looking at how much the central bank lets the yuan move against the dollar, within its announced policy band of 0.5% in either direction each day.
