Renminbi takes first step

Frank Gong, JP Morgan's chief economist for China based in Hong Kong, said that the bank is looking for a total 7% appreciation in the Chinese currency unit versus the US dollar by the end of the year, and 15% by the end of 2006.

Deutsche Bank has put its 12-month RMB appreciation target to 7.7 per dollar – 5% more than Friday's 8.11. The German bank is predicting that after 24 months, the rate will be 7.3 per US dollar – an appreciation of just under 10%.

In what is viewed as the first small step on a path to greater exchange-rate flexibility, the People's Bank of China (PBoC) last Thursday announced a move to a managed float regime.

The RMB is now linked to a basket of currencies and a shift in the rate revalued to 8.11 from 8.28 against the dollar.

The Chinese central bank said it would continue to allow the trading price of the US dollar against the RMB to float within a band of plus or minus 0.3% around an official rate published each day by the PBoC. For all other foreign currencies the RMB will be allowed to float within a certain band also to be announced by the central bank.

The shift caused a huge spike in trading on Thursday. Participants in the EBS Spot market from across the globe traded more than $211 billion (single count) on Thursday July 21, compared with the previous record of $203 billion set in November last year and an average of $120 billion.

The PBoC said it would maintain the exchange rate at "basically stable levels in order to promote basic equilibrium for the balance of payments and safeguard macroeconomic and financial stability".

Jun Ma, chief economist for Greater China at Deutsche Bank in Hong Kong, said: "The central bank can appreciate or depreciate, so you have the full flexibility to manage the exchange rate now. They will observe the outcome for a while before they make a significant move."

The Chinese move was closely followed by a change in the Malaysian currency regime that same day. Like the renminbi, the ringgit has also adopted a managed float system. The exchange rate will be monitored against an undisclosed trade-weighted currency basket to ensure that the exchange rate remains close to its fair value, said the central bank, Bank Negara Malaysia.

It said that, as the current value of the ringgit is consistent with fundamentals, it is not likely to deviate significantly from current levels.