China may switch to currency basket for forex rate

Market Watch (Link) (July 23, 2010)

A top Chinese central bank official suggested switching away from the U.S. dollar as a benchmark for the yuan�s foreign-exchange rate, switching instead to a basket of currencies, according to remarks published Thursday.

In comments posted to the People�s Bank of China Web site, the central bank�s Deputy Gov. Hu Xiaolian said using a basket of currencies from the nation�s top trading partners would allow the Chinese yuan to better reflect trading fundamentals.

�Compared with pegging to a single currency, the exchange-rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner,� she said.

China�s central bank currently sets a �central parity rate� against the U.S. dollar each day, with that day�s trading range confined to 0.5% above or below that level.

But Hu said focusing on the dollar-yuan rate ignored China�s bigger trade picture.

�A floating exchange rate has impact on total imports and exports of an economy,� she said. �Therefore, the floating cannot be aimed to adjust [only the] bilateral trade balance, and it is not advisable to just look at the [dollar-yuan] exchange rate.�

See Hu�s full comments in English on the People�s Bank of China Web site.