China's currency, the renminbi (yuan is Mandarin for unit; renminbi is Mandarin for peoples' currency) surged in the futures market on Monday after China signalled at the weekend that it would break the currency’s two-year peg to the dollar.

The People's Bank of China issued a statement Saturday saying the time was appropriate to proceed with the reform of the renminbi exchange rate regime and increase the Chinese currency's exchange rate flexibility given the strong economic rebound at home and the gradual recovery abroad. Domestically, by allowing the renminbi exchange rate to reflect market supply and demand with reference to a basket of currencies, Chinese policymakers have sent a clear signal that the country cannot wait any longer to shift away from its heavy dependence on exports for growth.

China's currency appreciated less than 20% from mid-2005 to July 2008 when it was linked to a basket of currencies and allowed float within a narrow range. It was then pegged to the US dollar in July 2008 at a rate of 6.83 to protect exporters over the three year period.

The PBOC said in a follow-up statement on Sunday that a more flexible currency will “direct resources to domestic- demand driven sectors such as services” and help curb an excessive reliance on exports, signaling it anticipates the currency will rise.

There was no change in the official renminbi exchange rate on Monday but twelve-month forwards  rose 1.3% to Rmb6.6235 against the dollar, implying that traders expected a 2.8% appreciation over the coming year.

China boosted holdings of Treasuries notes and bonds by 2.6% to $900.2bn in March and April, after reducing its stake by 6.5% from November through February, the longest consecutive monthly declines in a decade

SEE: Finfacts article; A dialogue on the Chinese renminbi

Charlene Chu, senior director at Fitch's Financial Institutions Ratings Team, says the most important thing to note about China's decision to allow yuan appreciation is that mainland authorities are confident about the economy's recovery. She speaks to CNBC's Bernard Lo and Emily Chan:

Chinese move positive in short term, but plenty yet to be clarified; Davy chief economist, Rossa White, comments  - -"China has announced that it will relax its currency peg against the US dollar. It will revert to the 2005-2008 arrangement of a managed float against a broader basket of currencies including the euro and yen. We do not yet have any real specifics on by how much and when the currency will be allowed to move. For risky assets, it is a short-term positive at least.

Many cynically see this as a pre-emptive strike by China ahead of this weekend's G-20 meeting. It has been under pressure to relax its hold on the currency, highlighted by the prospect of a retaliatory trade bill passing through US parliament. Either way, it should help reduce protectionist tensions, which have been bubbling for a time and were threatening to undermine global recovery. By how much will depend on the magnitude of the revaluation and the reaction of the hardliners in Washington.

The reaction in the equity market is likely to be positive. Global recovery originally emanated from a recovery in Chinese domestic demand early in 2009. A stronger currency will boost its purchasing power further, helping to suck in rest of world imports (that is a positive for commodities). In a way, it is a statement on global recovery by the Chinese authorities: they must believe other economies are strong enough to buy their exports at a higher price. The US bond market, and the dollar by extension, may suffer somewhat. China may not have to recycle as much of its foreign currency earnings into US treasuries, and the dollar may nudge lower in line with improving risk appetite anyway."

A strengthening yuan is unlikely to affect commodity demand and prices, says Klaudius Sobczyk, senior fund manager at Veritas Investment Trust. He explains why to CNBC's Anna Edwards, Chloe Cho & Yousef Gamal El-Din:

Economic View: Fragile, but stabilising; Goodbody economist: Deirdre Ryan T comments  - - "The tide of improved sentiment continued into the latter part of the week with yield spreads unchanged or narrower across all peripheral Eurozone economies on Friday. Financial stress indicators have also improving marginally; The TED spread (the spread between 3mth US Libor and the OIS rate) is now down 4bps from its peak early last week and stands at 44bps this morning. Money market spreads, too, have narrowed slightly. For the first time since June 4, the 3 month Euribor spread (versus the OIS rate) stands at 30bps this morning. After a turbulent period, markets are now showing very initial signs of stabilisation.

The decision by China to allow a gradual appreciation of its currency versus the dollar will likely add to the improved confidence levels today. Nevertheless, there is much to go yet in relation to rebuilding confidence levels in the Eurozone. Restoring the regulatory framework will be a key factor in this and we note press reports this morning that ECB President Trichet is to propose the setting up of an independent fiscal council for the region in a further sign of the move towards enhanced budgetary surveillance that is in store. It has been a testing time for Eurozone policymakers, but maybe there is light at the end of the tunnel after all."

Martin Wassell from International Chamber of Commerce spoke to CNBC about the key issues at the upcoming G-20 meeting in Toronto this weekend:

BP: A worker on board the Deepwater Horizon rig, has told the BBC that he identified a leak in the oil rig's safety equipment weeks before the explosion on April 20th which resulted in the catastrophic leak in the Gulf of Mexico.

Tyrone Benton said the leak was not fixed at the time, but that instead the faulty device was shut down and a second one relied on. BP said rig owners Transocean were responsible for the operation and maintenance of that piece of equipment and said it tested the device successfully before the accident.

On April 20th, when the Deepwater Horizon rig exploded killing 11 people, the blowout preventer, as the device is known, failed. 

The most critical piece of safety equipment on the rig designed to avert disasters just like the oil spill in the Gulf of Mexico:

The BBC Panorama programme to to broadcast Monday night says the blowout preventer (BOP) has giant shears which are designed to cut and seal off the well's main pipe. The control pods are effectively the brains of the blowout preventer and contain both electronics and hydraulics. This is where Benton said the problem was found.

"We saw a leak on the pod, so by seeing the leak we informed the company men," Benton said of the earlier problem he had identified. "They have a control room where they could turn off that pod and turn on the other one, so that they don't have to stop production."

Professor Tad Patzek, petroleum expert at the University of Texas, was blunt in his assessment: "That is unacceptable. If you see any evidence of the blowout preventer not functioning properly, you should fix it by whatever means possible."

Benton said his supervisor e-mailed both BP and Transocean about the leaks when they were discovered.

Asia