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Central Bank to Take Safe Approach on Currency Peg

China's central bank said it would take a "gradual and safe" approach to loosening the yuan-dollar peg, following International Monetary Fund calls to let the currency float in a wider margin.

A spokesman for the People's Bank of China quoted by the Financial Daily on November 6 said China would phase in moves to make the currency exchange rate more flexible.

The yuan is currently pegged in a narrow margin around 8.27 to the dollar under a regime enforced by the People's Bank of China. The spokesman said any moves to loosen the peg would be complex and would need to take many factors into consideration.

The bank would "adopt various measures to promote this reform gradually and safely," he said.

The bank's comments followed publication of an IMF report in Washington on Friday following meetings held with Chinese authorities in May.

The report said China was concerned that moves to relax the yuan-dollar peg could spark a speculative wave forcing the yuan higher.

"While acknowledging the need eventually for increased exchange rate flexibility, the (Chinese) authorities have strong reservations about making an initial move in present circumstances," the IMF staff said.

"In particular, they were concerned that a small initial move could exacerbate capital inflows."

The statement appeared to reflect a concern that many overseas investors believe the yuan is undervalued.

However IMF staff said they were not convinced that the yuan was "substantially undervalued" and suggested that "a larger initial move would be necessary" if sizeable speculative capital inflows were to continue