China abruptly on Thursday evening allowed its currency, the yuan, to appreciate by a modest 2 percent, but said its exchange rate will not float by a big margin, aiming apparently to ward off speculative activities betting on the yuan's further jumps.

The overall aim of exchange rate reform is to build a managed, floating exchange rate mechanism based on market supply and demand and to maintain the yuan's basic stability at a reasonable equilibrium, the People's Bank of China (PBC), or the central bank, said.

Big ups and downs of the exchange rate are not in line with the fundamental interests of China since such fluctuation will pose a fairly big threat against the country's economic and financial stability, it said.

"The circumstance (the yuan's big ups and downs) will definitely not happen," the bank told the press.

Firstly, the renminbi will no longer be pegged to a single currency following the rate reform. Instead, as the value of the yuan will be adjusted with reference to a basket of currencies, the mutual changes of major currencies in the world market will reduce the yuan's fluctuation.

Secondly, the international balance of payment will tend to balance basically with economic tools including the exchange rate playing a consolidated basic role in allocating resources, foreign exchange supply and demand being further streamlined and the adjustment mechanism of international balance of payment being improved. This will lay a solid basis for yuan's stability, the PBC said.

Thirdly, China will actively coordinate macro-economic policies and steadily push for all kinds of reforms to provide a sound environment for the stability of its currency.

Finally, the PBC itself will endeavor to enhance its fine-tuning ability, improve foreign exchange management and keep the yuan trading at a reasonable equilibrium, it said.

Some economists had argued that if the yuan is revalued just by a small margin, investors would bet on its further appreciation.

The central bank said Thursday the exchange rate reform is designed to cater to the need of alleviating foreign trade imbalances, stimulating domestic demand, sharpening the domestic enterprises' competitive edge globally and speeding up the country's reform and opening-up.

It cited that China's foreign exchange reserves skyrocketed to 711 billion dollars by the end of June on the back of its trade surpluses. China still exercises foreign exchange controls, which means that enterprises cannot keep all of their foreign currency earnings and that a large part of foreign exchange inflows will become the country's reserves.

Some developed countries, typically the United States, say that China artificially lowers the value of yuan, giving its exporters an "unfair" advantage and hurting the job markets in other countries. The yuan is pegged at around 8.28 to the US dollar since 1994.

But the PBC said the Chinese government always holds an "independent and highly responsible" attitude toward the exchange rate issue.

China adheres to choosing an exchange rate system that caters to its domestic situation by taking into consideration of its fundamental interests and economic and social development, it said.

"It is a fairly good opportunity to conduct the exchange rate reform now," the PBC said. The yuan will be traded at 8.11 to the US dollar.

The bank said the rate reform will exert "certain" influence on economic growth and employment, but there are more advantages than disadvantages. It added the PBC will create favorable conditions for domestic enterprises to tide over the rate reform period.

(Xinhua News Agency July 22, 2005)