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China widens yuan trading band against US dollar

Updated: 2012-04-14 10:32


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BEIJING - The People's Bank of China (PBOC), the country's central bank, announced Saturday it will widen the yuan's daily trading limit against the US dollar to 1 percent from Monday.

In the foreign exchange spot market, Chinese banks can exchange the yuan 1 percent above or below the central parity against the US dollar announced by the China Foreign Exchange Trading System each trading day.

Previously, the daily trading limit was set at 0.5 percent.

The announcement came a month after PBOC governor Zhou Xiaochuan told Xinhua on the sidelines of the annual parliamentary session that the country is considering "appropriately" widening the yuan's trading band to better reflect an exchange rate regime decided by market supply and demand.

China's current foreign exchange market is developing more maturely and trading entities are more capable of pricing independently and managing their risks, the PBOC said in a statement on its website.

Adjusting to the demand of market development, widening the yuan's trading band aims to promote exchange of the Renminbi, boost the yuan's two-way fluctuation flexibility and improve the market-based managed floating exchange rate regime tied to a basket of foreign currencies, according to the PBOC.

The central bank pledged in the statement that it will maintain the "normal fluctuation" of the yuan's exchange rate, stabilize the rate at "reasonable and balanced levels," and keep the macro economy and financial markets stable.

Zhao Qingming, a senior researcher with China Construction Bank, said the widening of the yuan's trading band against the US dollar is helpful to bring the exchange rate of the Chinese currency to balanced levels.

"The PBOC's move (to widen the trading band) has been much anticipated for a long time," said Lu Zhengwei, chief economist of the Industrial Bank, welcoming the central bank's long-awaited announcement.

Lu said he hoped the trading band would be further extended, to 2.5 percent in about 10 months, then to between 10 percent to 20 percent in three years to prepare for the free floating to provide a buffer zone for the greenback's future fluctuation.

Calling it "a symbolic move" by the PBOC, HSBC economist Qu Hongbin said the widening of the trading band implies the trend for the yuan's one-way appreciation has come to an end.

"The yuan will be ushered into a new era of truly two-directional fluctuation," Qu said, citing "great changes" in the yuan's fundamentals.

"China's foreign trade is coming to an almost balanced level and the yuan has appreciated 30 percent against a basket of major currencies since 2005 to approach very closely the market's balanced level," Qu added.

China swung back to a trade surplus in March from February's deficit of $31.48 billion, posting a $670million trade surplus in the first quarter, according to customs data.

However, Zhao Qingming, the economist for CCB, China's second-largest lender, said whether China will allow a wider trading band remains unclear.

"We can't expect too much from it, because the widening is merely a technical adjustment," he explained.

According to Zhao, judging by the daily fluctuations of major currencies, it is extremely rare to see daily changes reach or exceed 1 percent.

The yuan strengthened 5 basis points to 6.2879 against the US dollar on Friday.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices before the opening of the market each business day.