The governor of China's central bank, Zhou Xiaochuan, yesterday revealed details of the basket of currencies used to determine the value of the yuan.

 

Dominant among a raft of currencies are the US dollar, the euro, the yen and South Korea's won.

 

The Singapore dollar, pound sterling, Malaysian ringgit, Russian rouble, Australian dollar, Thai baht and the Canadian dollar are also considered in the calculation, Zhou said.

 

Speaking at the opening of the second headquarters of the People's Bank of China (PBC) in Shanghai, Zhou explained that the currencies were chosen for their share of China's foreign trade, foreign debt and foreign direct investment.

 

At the moment, the US, the EU, Japan and South Korea are China's biggest trading partners. "Their currencies are naturally the main ones in the basket," Zhou said.

 

Any economy that has an annual bilateral trade volume of more than US$10 billion cannot be neglected in the basket, Zhou said.

 

Those with an annual trade volume of more than US$5 billion should also be considered, Zhou added.

 

Zhou did not give details of how individual currencies are weighted in the basket.

 

On July 21, China cut the yuan's 11-year peg to the US dollar, allowing it to move in a restricted float, that is, to rise or fall by 0.3 percent a day against the greenback.

 

It also announced that a basket of currencies would determine the exchange rate of the renminbi.

 

The yuan gained 2 percent against the US dollar on the day of revaluation, and has appreciated slightly since.

 

The yuan closed at 8.1062 against the US dollar yesterday.

 

Raymond So, an associate professor with the Department of Finance at the Chinese University of Hong Kong (CUHK), applauded the disclosure of constituent currencies in the basket.

 

"It is a tactical move by the central bank to track the yuan with the US dollar, the euro, the yen and the currencies of smaller trading partners."

 

The euro and the yen are moving in a direction virtually opposite to the US dollar, so that could provide a hedge against wide fluctuations in the foreign currency market, So noted.

 

"More important, the disclosure of the currency package could ease the pressure from China's trading partners to further revalue the yuan as the interests of the US, the EU and Japan will be divergent."

 

Chan Bo-ming, senior economist at DBS (Hong Kong), also welcomed the disclosure but added: "The currencies included in the basket have been anticipated by the market so the disclosure would have almost no impact on the yuan. It will ease US pressure on China's monetary policy."

 

(China Daily August 11, 2005)