It is not yet clear exactly which currency policy will be followed, but the decision provoked surprise among world financial institutions.
Many analysts believe that this is a first step towards a campaign of yuan revaluation, long awaited on the market.
China has raised the yuan by 2.1% to 8.28 to the dollar from a previous 8.11. However, Frank Gong of JP Morgan predicts that China will allow the yuan rate to grow by 7% against the dollar this year, and 10% in the coming year.
Analysts believe that these measures suggest a first step by Beijing towards a fully convertible yuan. According to various estimates, the yuan rate is currently undervalued by 30-40%. This has given the country a substantial advantage on world markets. During the last few years, China has become the main competitor of the U.S and the E.U. in terms of global trade. American and European producers have long been complaining that they are losing a price war with Chinese goods.
According to Viktor Shpringel of the Open Economy Institute, China's decision suggests that it wants to avoid trade sanctions from its competitors. If the Chinese currency rate rises, goods prices will climb on external markets and imports into the country will decline.
Some analysts see the decision as a signal that China is giving in to U.S. pressure, and as of yet has no ambitions to become a second superpower. However, in recent times the Chinese economy has been expanding so quickly that it seems to be heading in that direction.
The yuan's revaluation should benefit China economically. There have been numerous warnings recently of an over-heating of the Chinese economy. The GNP growth rate in the second quarter of 2005 exceeded analysts' forecasts, reaching 9.5% due to higher export and consumer demand.
China remains a world leader in terms of foreign direct investment. Shpringel believes that the Chinese Central Bank's decision will cause a sharp "cooling down" of the country's economy.
According to Russia's Central Bank Deputy Chairman Konstantin Korishchenko, the decision will have a strong influence on the ruble in the short-term.
Shpringel believes that the first consequence in Russia will be a sharp strengthening of the yuan against other world currencies, so that anyone holding yuans - which applies to certain Russian Banks - will profit.
The small category of Russian products which has been suffering from competition with Chinese imports - certain electronics items and toys - will be able to breathe more freely.
