Beijing: China will gradually make the yuan's exchange rate more flexible, the central bank in Beijing said yesterday a week before a G20 summit, strongly suggesting that it was ready to break the currency's 23-month-old dollar peg.

However, it all but ruled out a one-off revaluation or major appreciation, saying there was "no basis for big fluctuations or changes" in the exchange rate.

The dollar peg has come under intense fire from abroad as China's export juggernaut roared back to life, while much of the rest of the global economy remained sluggish and beset by unemployment in the wake of the financial crisis.

Just ahead of a G20 summit in Canada, the announcement seemed to be intended to placate critics of China's currency regime.

US President Barack Obama welcomed China's announcement. "China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement later Saturday.

Positive gesture

"We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar," Goldman Sachs economists Yu Song and Helen Qiao said.

The news could soothe investor fears of a trade row between the US and China at a delicate time for the world economy and propel world stock markets higher tomorrow.

It was clear that China intended its announcement to mark the end of the yuan's de facto peg to the dollar, which it had defended as a "special policy" to protect its economy from the global financial crisis.

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability," the Chinese central bank said in a statement.

Dominique Strauss-Kahn, head of the International Monetary Fund, also saluted the announcement, saying it would boost Chinese household incomes and domestic investment, key ingredients for rebalancing the global economy.

In practice, it is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.

Initial movements in the yuan's exchange rate will probably be small, but cumulatively, it could amount to several percentage points of accumulation over the next few months, several analysts said.

The "crisis-mode" of locking the yuan to the dollar was over, but any appreciation would likely be slow and modest, said Li Daokui, an academic adviser to the People's Bank of China, the central bank.