China announced today that it is scrapping the yuan’s peg against the dollar in favour of a basket of currencies, the first step in a long anticipated move to float the currency.

The new yuan rate against the US dollar revalues the currency by 2.1 per cent to 8.11 yuan per dollar, China’s central bank annnounced.

The People's Bank of China said it was making the changes "with a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand".

The Bank said that, as from today, the renminbi, the local name for the yuan, "will no longer be pegged to the US dollar and RMB exchange rate regime will be improved with greater flexibility.

"The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day," it said.

Yen rallies sharply

Japan’s yen rallied sharply against the dollar and the euro as traders bet the stronger Chinese currency would be positive for its near neighbour.

"In general the reaction we have seen is the same as what we saw last time when they raised interest rates. People are buying the yen again," Kristjan Kasikov, currency strategist at Calyon, told Reuters.

Observers' first questions of the move were the identity of the currencies included in the basket, and for details of the exact terms of the daily evaluation of the yuan against that currency basket - the amount of variation and the market it would be referenced to.

"If the currency basket is dollar dominated, then not much will have changed," was one view put to Times Online.

"The timing is clever," Julian Jessop, chief international economist at Capital Economics, said. "By changing the peg well in advance of President Hu Jintao’s visit to Washington in September, Beijing may be able to avoid giving the impression of bowing too obviously to US pressure, while still doing the bare minimum necessary to defuse trade tensions.

"Instead, the change can be linked to the strong Chinese GDP data released yesterday. The 9.5 per cent growth in the second quarter showed that the economy is in good shape to make the next step towards a more flexible currency regime, which has long been China’s stated aim.

"However, the details are still vague," Mr Jessop continued. "The statement says that the ‘renminbi will no longer be pegged to the dollar’. Nonetheless, it has also announced that the exchange rate against the dollar ‘will be adjusted to 8.11’, and that the existing daily trading band of +/-0.3 per cent around this central rate will be retained. In a true basket system, none of the components would be singled out in this way."

Hamish Low, a strategist at broker Execution, said: "It’s probably going to be a positive thing from the point of view of the US. It has been talked about for some time but there was always going to be an impact when it actually happened."

US stock futures surged, pointing to gains of between 0.5 and 0.75 per cent for the three main indices, but some cautioned the move was more important from a sentiment standpoint than for its actual economic impact.

"This looks like a very minimalist move, some have been looking for more," Mark Cliffe, an economist at ING, said.

"The fact the market has quietened down on the issue is probably why they are doing it now. It maybe relieves some of the pressure from the US with tariffs on the table in Congress but it remains to be seen if it is enough politically or economically. it is not going to change the trade position."

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