Business / Markets

Yuan exchange rate's floating range widened

By Jiang Xueqing (China Daily) Updated: 2014-03-16 07:07

The People's Bank of China announced on Saturday that it will widen the daily trading band for the yuan against the US dollar to 2 percent from the official midpoint effective March 17.

Currently, the exchange rate of the yuan against the dollar is allowed to rise or fall by 1 percent above or below the official midpoint rate on any given trading day.

"Widening the floating range of the yuan exchange rate will help deliver efficient capital allocation and accelerate economic restructuring," said a spokesman of the PBOC, the nation's central bank, in a statement published on its website.

"Generally speaking, the 2 percent adjustment is appropriate and will cause relatively low risks," the spokesman said.

However, if the yuan exchange rate fluctuates abnormally, the PBOC will take necessary regulatory measures to maintain its normal trajectory, he added.

"With the yuan's exchange rate floating two ways, people should pay more attention to its trends in the medium and long term rather than in the short term," he said.

Wen Bin, director of macroeconomic research at the Bank of China's institute of international finance, said the 2 percent widening of the daily trading band for the yuan will fully reflect market trends.

"It shows that the PBOC is determined to promote yuan exchange-rate marketization. In the future, China's central bank is likely to further widen the trading band to 3 percent, which will better reflect market flexibility," he said.

The Chinese foreign exchange market has developed rapidly since 2005. Today, domestic companies have an increasing number of measures to deal with foreign exchange-rate risks, according to the PBOC.

Wen pointed out Chinese companies will do more yuan-to-forex business to avoid possible risks brought by two-way fluctuations of the yuan.

In the past, domestic companies were unwilling to do yuan forward transactions as the yuan kept rising against the dollar.

As the market anticipated an ever-appreciating yuan, domestic companies used to borrow from the bank in foreign exchange while making yuan deposits to make money with arbitrage.


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