China to guide yuan with eye on major currencies

By Zhou Xin and Jason Subler

BEIJING (Reuters) - China said on Wednesday it will consider major currencies in guiding the yuan, suggesting a departure from an effective dollar peg that has been in place since the middle of last year.

The reference to a new set of benchmarks for determining the value of the yuan holds out the possibility of a departure from recent practice, which has seen the currency held steady since mid-2008 around 6.83 per dollar.

"Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism," the central bank said in a 46-page monetary policy report.

It was the first time since the landmark revaluation and launching of forex reforms in July 2005 that the People's Bank of China has strayed from the language of keeping the yuan "basically stable at a reasonable and balanced level" when discussing future forex reforms in such quarterly reports.

The comments come ahead of a visit to China next week by U.S. President Barack Obama, and amid growing pressure from other countries for Beijing to be more flexible in how it handles the yuan in the face of dollar weakness.

Ding Zhijie, a professor with the University of International Business and Economics in Beijing, who also provides advice to government, said the change in wording shows that Beijing is ready to end the de-facto peg to the dollar in place since mid-2008.

"The exchange rate policy in the last year can be viewed as an extraordinary policy for an extraordinary time," Ding said. "Now, it is time to bring closure to it."

Ding added that the central bank would also continue to reform the yuan to make the yuan exchange rate more flexible.