CHINA has moved to defuse international pressure for fairer trade by taking another small step to allow market forces a greater role in valuing its currency.

The yuan will in future be allowed to fluctuate by up to 3 per cent against the euro, the yen and sterling without the intervention of the People’s Bank of China.

The concession will double the width of the 1.5 per cent fluctuation band that was set two months ago, when Beijing took the first, cautious measures to loosen the yuan’s fixed US dollar exchange rate. But the latest loosening of the reins does not affect the yuan’s dollar exchange rate, which is still permitted to vary by only 0.3 per cent before China’s central bank puts a stop to it.

China has built up huge reserves of foreign currency by artificially keeping its exchange rates down at a time when it has been running a strong trade surplus and has been attracting record foreign investment. America and Europe have both raised pressure on the Chinese authorities to free the currency.

America’s trade deficit with China is its biggest. However, eurozone competitors found that, under the fixed dollar exchange system, Chinese goods automatically became even more competitive against their own, as the dollar weakened against the euro.

China finally revalued its currency by 2 per cent in July and said that the yuan would in future be kept stable against a basket of currencies, filled largely by the dollar. Fluctuations in world markets have made it easier to manage the yuan if it is allowed to move further against non-dollar currencies.

China’ s latest move led to the dollar strengthening against the euro yesterday, helping to make eurozone foods more competitive.

Traders said that China’s widening of the band was a technicality to cope with wider fluctuations in world markets, rather than a significant policy development. But the timing has worked in China’s favour.

The Group of Seven top economies meeting in Washington is understood to have altered the language of its communiqué on exchange rates to acknowledge China’s latest move. This has softened criticism of China for acting too slowly in the face of huge financial imbalances.

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