China announced on Tuesday that it will cancel the tax refund for some exported products, effective from July 15th. According to the Ministry of Finance, the tax refund will be cancelled on some exported steel, non-ferrous metals, silver powder, alcohol, corn starch, pesticides, medicines, chemical products, plastic goods, rubber and glass products.

The ending of the renminbi peg with the US dollar; China tries to stall rise in currency

Following Saturday's surprise announcement by the People's Bank of China (PBoC) of an ending of the renminbi peg with the US dollar that had been in effect since July 2008, and the return the managed float system, which resulted in a rise in the value of the Chinese currency by 17.5% since mid-2005, China on Tuesday left the renminbi drop slightly in value against the dollar in a move that was seen as deterring speculators benefiting from a stronger currency.

The PBoC had initially set the reference point for the day's trading 0.43% above Monday's level, to the highest level in five years, which appeared to be a signal it was comfortable to see a slight appreciation in the currency. However, while the renminbi initially rose against the dollar, by the end of trading Tuesday it had fallen 0.23% to CNY6.8136 compared with the peg rate of 6.828. Traders are reported to have said state-owned banks had been in the market buying dollars, which they saw as a sign the authorities were trying to control tightly the value of the renminbi and limit expectations of future gains. On Monday the currency rose 0.42% against the dollar.

In the markets, the optimism that greeted China's decision, in advance of the G-20 summit in Toronto this weekend,  was replaced Tuesday with continuing concerns about the Eurozone banking sector and the US housing market.

Morgan Stanley economist, Qing Wang, based in Hong Kong, summarised the impact of China's move.

1) A renminbi exit from the USD peg would lower the risk premium of the equity market stemming from fear of a Sino-US trade war.

2) It helps contain ‘imported' inflation pressures and therefore reduces the probability of an aggressive monetary tightening in China through stringent credit controls and/or consecutive interest rate hikes.

3) A modest initial revaluation to be followed by gradual appreciation would fuel expectations of further appreciation over time.

Impact on our economic and policy calls:

• MS said it maintains its forecasts for the USD/CNY spot rate to reach 6.60 by end-2010 and 6.20 by end-2011.

• It changed its interest call from "no more than one rate hike in 2H10" to "no rate hikes through 2010".

• It attaches a high probability that the target of new bank lending of Rmb7.5trn for 2010 could be revised upward by 4Q10.

• In view of this desirable policy change, MS maintains its call for a Goldilocks scenario (not too hot or too cold) in 2010, featuring 11% GDP growth and 3.2% average CPI inflation, while noting that the balance of risks on both fronts is tilted slightly to the downside.

The pre-crisis technical arrangement for the renminbi trading band is unchanged: Qing said it is important to understand how the existing (or pre-crisis, pre-new peg) trading band works technically. At the beginning of each trading day, the USD/CNY central parity of the current trading day is determined based on the weighted average of the price quotes provided by the market markers. The central parity rate is announced 15 minutes before trading begins each morning. The trading band applies to intra-day moves only in that the USD/CNY rate is now constrained within ±0.5% of the renminbi-USD central parity of that trading date. However, the central parity rate may, in theory, vary by any magnitude from the closing rate of the previous trading day. In another words, the inter-day changes are not constrained by the band.

Although the central parity of renminbi-USD exchange is, in principle, determined based on the weighted average of the quotes from market makers, it is still heavily managed by the PBoC, which has considerable discretion over determining the weights when the weighted average is calculated. Thus, the pace of renminbi appreciation ultimately hinges on how comfortable the Chinese authorities are with allowing faster appreciation of the central parity rate instead of the intra-day volatility around the central parity rate.

Paul Donovan, managing director and deputy head of global economics at UBS, says markets are better placed to set values on currencies than governments. He speaks to CNBC's Karen Tso, Martin Soong and Bernard Lo about the increasing intervention in the FX markets:

PBoC's press statement:Below is the text posted by the PBoC in announcing the policy change under the title "Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility."

"In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People's Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the USD depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis' impact, contributing significantly to the Asian and global recovery, and demonstrating China's efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China's external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People's Bank of China will further enable the market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China."

IMF statement: Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today on China's exchange rate regime:

"The People's Bank of China's announcement to increase exchange rate flexibility and return to the managed floating exchange rate regime in place prior to the global financial crisis is a very welcomed development. A stronger renminbi is in line with findings of the G-20 Mutual Assessment Process, to be presented in Toronto next week, and will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer."