China to Relax Yuan Dollar Peg, People's Daily Says (Update1) May 11 (Bloomberg) -- China will loosen the yuan's fixed- exchange rate for the first time in a decade, according to the online edition of the People's Daily, a Communist Party-owned newspaper. The paper didn't say where it got the information. The yuan will be allowed to rise or fall from 1.26 percent to 6.03 percent ``in a span of one month and one year'' after a meeting next week between U.S. and Chinese officials, according to the People's Daily Online. The currency has been pegged at about 8.3 per dollar since 1995. A central bank spokesman declined to comment. The yen strengthened against the dollar and the euro after the report. Letting the yuan strengthen may help President Hu Jintao control inflation by reducing the cost of imported products such as oil and copper, which are priced in dollars. It also gives the central bank, which has sold yuan to prevent the currency from appreciating, more scope to increase interest rates to cool an economy that expanded 9.5 percent in the first quarter. ``Without moving the exchange rate, it looks like the Chinese authorities are struggling to slow the economy down,'' said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. ``The only way to deal with that and get better control over monetary policy is to change the currency regime.'' He predicted a move by May 18. He spoke before the report was published. `Too High' The rate of growth is ``too high,'' Deputy Finance Minister Li Yong said at an Asian Development Bank meeting in Istanbul on May 6. Producer prices rose 5.6 percent in March, the first gain in five months, and Premier Wen Jiabao said on April 14 prices of raw materials are rising too fast. Factory prices rose 8.4 percent in October, the fastest in six years. ``The aim is to try to engineer a soft landing in the economy and contain externally caused inflationary pressure,'' said Frank Gong, chief Asia economist at JPMorgan & Chase Co. in Hong Kong. ``A moving currency makes more sense.'' Gong, a former Federal Reserve economist, predicted on April 29 China would let the yuan fluctuate before the end of weeklong national holidays on May 8. He spoke before the report. Permitting the yuan to trade more freely also addresses criticism from Fed Chairman Alan Greenspan and U.S. Treasury Secretary John Snow. ``Fixing the renminbi to the dollar is beginning to work to the detriment of the Chinese economy,'' Greenspan told the Senate Budget Committee on April 21. ``It's very much in their interest to move.'' The yuan is also referred to as the renminbi. Congressional Attacks Legislators including Democratic Senator Charles Schumer of New York and Republican Senator Lindsey Graham of South Carolina say China kept the yuan artificially low to get trade advantages. The two, who proposed a tariff on Chinese imports unless China revalued the yuan, blame the peg for the loss of 2.8 million factory jobs and a record $162 billion trade deficit with China. ``If there is more pressure from outside, it will force us to speed up our reform,'' Chinese Central Bank Governor Zhou Xiaochuan said at the Boao Forum on the southern Chinese island of Hainan on April 23. French Finance Minister Thierry Breton told business leaders in Chartres, France, on April 29 the yuan is as much as 30 percent undervalued. Investors have bet on a change in China's currency since 2002, according to trading of non-deliverable forward contracts. The yuan would rise to 7.799 against the dollar in a year if freely traded, the contracts showed at 5 p.m. in Hong Kong on May 6, implying an appreciation of 5.76 percent. ``They are moving toward a floating exchange rate in a series of baby steps,'' said Marvin Barth, a currency strategist at Citigroup Inc. in London. ``If you let the exchange rate become more flexibile, there is one clear direction it's going.'' He spoke before the report. Chinese Economy China's $1.6 trillion economy, which accounted for a 10th of world growth last year, has trebled in size since the yuan peg was introduced. Foreign direct investment jumped 14 percent to a record $60.6 billion in 2004, according to government figures. A year earlier, China surpassed the U.S. as the biggest recipient. The People's Bank of China has to buy dollars that flow into the economy to maintain the currency peg, adding yuan to the economy and diluting the impact of state lending curbs. The central bank spent $193 billion buying foreign currency in 2004, a 41 percent increase from a year earlier, it said on Feb. 28. The central bank raised its lending and deposit rates on Oct. 28, the first increase in a decade, to complement limits on investment in property, steel and autos that have driven prices higher and strained power supplies. Zhou will probably lift rates three times this year, said Barth at Citigroup. Interest Rates, Inflation ``Clearly, it will be more effective if you combine currency and interest-rate policies,'' Uwe Parpart, Bank of America Corp.'s senior market strategist in Hong Kong, said before today's announcement. ``China wants to slow down inflation and growth. Raising rates and the value of the currency both push things in that direction.'' He predicted China would change the peg in the second half. Wen is seeking to cap inflation at 4 percent this year from a peak of 5.3 percent in August. Consumer price increases averaged 2.8 percent in the first quarter, and letting the yuan strengthen will help contain inflation, said Malcolm at Deutsche Bank. The lender is the largest trader in the foreign-exchange market, according to a Euromoney magazine ranking on April 27. ``We don't think this move will be due to political pressure from the U.S.,'' said Benedikt Germanier, a currency strategist at UBS AG in Zurich. An appreciation in China's currency would do little to cut the U.S. trade deficit or boost job growth, and would likely be more of a boon to other Asian nations, a U.S. Commerce Department report said. The confidential report, provided to lawmakers in February, said it would take a 25 percent decline in the dollar against all foreign currencies to cut the trade gap, and even that would have a small impact on employment. U.S. companies say China's policy of fixing the yuan at the rate of 8.3 to the dollar gives Chinese products an unfair price advantage over American goods. ``Instead of significantly reducing U.S. imports, a decline in the value of the dollar against the yuan alone would mostly benefit China's competitors,'' the 44-page report says. ``Many of the goods the United States imports from China would likely be purchased from manufacturers in other Asian countries.''