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London - Global equities surged on Monday when investors welcomed a promise by China to relax constraints on the yuan, ahead of this weekend's G20 summit of world leaders in Canada.
China said over the weekend that it would allow the yuan more flexibility in adjusting to market forces.
This was widely seen as a move to head off a dispute with the United States over exchange rates at the looming Group of 20 gathering in Toronto on June 26-27.
In early trading, Frankfurt shares leapt 1.39%, London jumped 1.13% and Paris gained 1.61%.
The European single currency climbed against the yen and dollar, as the Chinese move encouraged investors to buy the risk-sensitive euro.
The yuan climbed on Monday to the highest level against the dollar for five years.
And oil prices rose strongly, breaching $79 per barrel on expectations of higher demand from Chinese consumers.
"Investor sentiment has improved quite dramatically over the weekend, with the news that China has pledged to allow its yuan to appreciate, helping to drive all major markets higher," said analyst Joel Kruger at trading website DailyFX.
"Global equity, commodity and currency prices have all jumped out to a good start in the early week, and it will be interesting to see just how long this development is able to keep a more broadly cautious market afloat."
In Asia, the Tokyo stock market rallied 2.43% and Hong Kong leapt 3.08%.
Shanghai jumped 2.90%, Sydney won 1.33% and Singapore picked up 1.62% in value.
Markets welcome the move
"Asian equity markets were stronger across the board ... as the Chinese authorities signal preparedness to allow resumed appreciation of the yuan," said analyst Bernard McAlinden at NCB stockbrokers in Dublin.
"This is a positive move that de-fuses protectionist tensions between the United States and China, while allowing the re-balancing process in global trade and credit flows to continue."
China's central bank said at the weekend that it would "strengthen the flexibility" of the yuan exchange rate, boosting hopes that Beijing was ready to adjust a two-year-old dollar peg and allow the currency to rise.
However, the People's Bank of China also insisted there would be no "large swings" in the currency and ruled out a one-off revaluation.
Beijing's move comes as it faces mounting pressure to strengthen the yuan ahead of the G20.
The currency, effectively pegged at about 6.8 to the dollar since 2008, has been allowed to move within a 0.5% range on either side of the peg.
The central bank said on Saturday it would maintain the existing trading band.
The Chinese currency surged on Monday to 6.8089, its highest level since a revaluation by Beijing in July 2005 but still within the 6.7934 and 6.8616 trading range.
Policymakers applaud China
Markets welcomed the move as it has been a constant irritant between China and other nations, particularly the US, where lawmakers claim Beijing deliberately undervalues its currency by about 40% to boost its exports.
Some economists argue that inflexibility in the yuan-dollar exchange rate was a root factor behind the global financial crisis.
They hold that it prevented foreign exchange rates from helping to reduce imports into the United States and the matching build-up of capital in China, much of which was used to buy US treasury debt and helped keep US interest rates down.
Senior European policymakers also applauded the statement by by Chinese authorities, and called for further steps as a way to boost growth in China and the world economy.
"The European Central Bank (ECB) and the President of the Eurogroup Jean-Claude Juncker welcome the decision ... to further reform the exchange rate regime of the renminbi (yuan)," the ECB said in a statement.
They also called for a "strong and stable international financial system" and noted that volatile exchange rates have the potential to harm economic activity.
"Given China's important role in the global economy, we encourage the authorities to allow for greater flexibility of the RMB (yuan) exchange rate as a means of promoting balanced growth in China and in the world economy."
- AFP
