YUAN’S TRADING BAND WIDENS AGAINST THE DOLLAR
April 17, 2012
On Saturday, the People’s Bank of China announced its decision to widen the currency trading band from 0.5 percent to 1.0 percent, allowing the renminbi to rise or fall by that amount from the official rate set by the bank, to be effective starting April 16.
“This underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate,” said Christine Lagarde, Managing Director of the International Monetary Fund.
The long-awaited move reflects China’s overall confidence on its economic fundamentals. In addition to creating greater exchange rate flexibility, the decision is hailed as a first step for allowing the yuan to be fully convertible. Full convertibility is necessary for the yuan to achieve the status of an international currency such as the dollar. With a fully convertible yuan, investors and businesses inside and outside of China would be able to trade the renminbi for other currencies.
Economists are also speculating on what further reforms are in China’s future. Lu Zhengwei, chief economist of the Industrial Bank of China, said he hoped the trading band would be further widened by as much as 10 to 20 percent over the next three years and China moves toward a more free floating currency.
However, others see it primarily as a move to placate critics of China’s currency policies in advance of the IMF and Group of 20 meetings or more of a symbolic move. HSBC economist Qu Hongbin suggested this marked the end of the renminbi’s one-way appreciation and would usher in a “new era of truly two-directional fluctuation” of the currency. Moreover, many in China cite the diminishing foreign trade surplus as evidence that the yuan is approaching a fair market value and additional moves to loosen currency restrictions are unlikely in the future.
The new rules for yuan trading follow the central government’s decision to allow residents of entrepreneurial Wenzhou to become the first Chinese to be able to invest directly overseas, to increase quotas for foreigners buying stocks and bonds in China and to raise the amount of yuan held offshore that can be invested locally.
For further information on China’s currency policy, please see the following news sources and commentary:
People’s Bank of China – Announcement No. 4, 2012
Financial Times –“China relaxes currency peg”
For Chinese commentary on China’s currency policy, please see the following news sources:
Caijing 财经 – “央行：协调推进利率、汇率改革和资本账户开放”
Xinhua 新华 – “人民币汇率改革迈出一大步”
Compiled and edited by Katie Xiao.