Yuan: China Gives Currency More Freedom With New Reform
By Koh Gui Qing
China took a milestone step in turning the yuan into a global currency on Saturday by doubling the size of its trading band against the dollar, pushing through a crucial reform that further liberalizes its nascent financial markets.
The People’s Bank of China said it would allow the yuan to rise or fall 1 percent from a mid-point every day, effective Monday, compared with its previous 0.5 percent limit.
The timing of the move underlines Beijing’s belief that the yuan is near its equilibrium level, and that China’s economy, although cooling, is sturdy enough to handle important, long-promised, structural reforms, analysts said.
The move would help China deflect criticism of its controversial currency policy ahead of the annual spring meeting of the International Monetary Fund in Washington next week.
A slowing world economy that has pared investor expectations of a steadily rising yuan likely also gave Beijing the confidence to proceed, knowing that a larger band would not necessarily lead to a stronger currency.
“The central bank chose a good time window to enlarge the trading band. The market’s expectation for a stronger yuan is weakening,” said Dong Xian’an, chief economist at Peking First Advisory in Beijing.
“The move partially clears away doubts on whether China can manage a soft landing in its economy, and makes clear China’s reform road map.”
Investors have widely expected China to widen the yuan’s trading band this year, thanks to repeated hints from Beijing that the change would take China one step closer to its financial goal: a basically convertible yuan by 2015.
Having a currency that trades with fewer restrictions also enhances Shanghai’s status as a financial center. China envisions turning the city into a global banking hub by 2020.
“From April 16, 2012, the trading band for the yuan against the dollar in the spot interbank currency market will be widened from 0.5 percent to 1 percent, ” the People’s Bank of China said in a short statement on its website.
“At present, the development of China’s foreign exchange market is maturing, the market’s ability to independently price and manage risks is growing by the day,” the bank said….
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