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Boosting yuan's flexibility

Updated: 2012-04-18 11:15

(China Daily)

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The People's Bank of China announced on Saturday the yuan will be allowed to fluctuate by 1 percent from a daily midpoint from Apr 16, double the previous 0.5 percent.

Although the yuan has appreciated against the US dollar 8.5 percent since June 2010, when China deepened its exchange rate reform, and about 30 percent since 2005, it has fallen 0.14 percent against the dollar since January.

The yuan's exchange rate is approaching an equilibrium level with the US dollar now, displaying characteristic two-way fluctuations.

The fall of the daily midpoint, after the largest monthly trade deficit was announced this February, was the largest for one and half years. Since then the daily midpoint has entered a period of ups and downs.

The pressure for the Chinese central bank to intervene in the exchange rate changes has been mitigated by weakening expectations of the yuan's appreciation amid concerns about the slowdown in China's economic growth.

So it is the proper time to increase the flexibility of the yuan. The timely increase in the trading band by the central bank is conducive to establishing an exchange system based on market forces and will promote the yuan as a freely convertible currency in the long run.

Increasing the flexibility of exchange rate will also discourage the short-term speculative capital flows that have been profiting from the yuan's appreciation against the dollar.

Once the exchange rate flexibility is no longer kept artificially low, the market can naturally play its part in adjusting the exchange rate and expelling large-scale short-term speculative capital.

Increasing the yuan's flexibility will also help strengthen economic growth in China as a whole. As the central bank's intervention in the exchange rate will be gradually replaced by market, the authority can spare more financial resources and energy to play up its macroeconomic control in the complicated global financial environment.

And as the yuan's long-term appreciation against the dollar evolves into market-oriented fluctuations, China's manufacturing industries and trade will start enjoying a more stable currency environment.