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China to keep the band of RMB exchange rate against USD
Updated: 2005-09-26 11:10

The People's Bank of China, the central bank, on Sunday announced that it has no plan to raise the float range of Renminbi exchange rate against US dollars.

After China abruptly allowed its currency, the yuan, to appreciate by a modest 2 percent on July 21, the trading price between US dollars and yuan can be fluctuated within 0.3 percent on the inter-bank foreign exchange market, and the trading price between non-US dollars and yuan can be fluctuated within 1.5 percent.

On Friday, the central bank announced in a circular to raise the float range of Renminbi exchange rate against non-US dollars from previous 1.5 percent to 3 percent.

The float range of yuan's exchange rate against US dollar, which now stands at 0.3 percent, is appropriate, said a spokesman with the central bank on Sunday.

Yuan's float range against non-US dollar currencies has long been higher than that against US dollars, said the spokesman.

Before the exchange rate reform, the float range of Renminbi exchange rate against euro was 10 percent while that against Japanese yen was 1 percent. Meanwhile that against US dollar was only 0.3 percent, the spokesman said.

The trading of US dollars plays a dominant role in China's inter-bank foreign exchange market, which leads to the narrower fluctuation range of yuan's exchange rate against US dollars, he said.

Experience from international foreign exchange markets shows that currencies with larger turnovers have narrower float ranges, he said.

The band widening of RMB exchange rate against non-US dollar currencies will prevent banks from unnecessary losses, the spokesman said.

When the exchange rate of euro against US dollar in the international market fluctuates 2 percent, the previous 1.5-percent float range on China's foreign exchange market would bring losses to banks, the spokesman cited an example as saying.

According to a circular released by the central bank on Friday, the spread between the RMB/US dollar selling and buying rate published by the foreign exchange designated banks with their customs shall not exceed 1 percent of the central rate announced by the central bank, and the limits on the spread of buying and selling rates for non-US dollar currencies against RMB are removed.

Loosening the control over posted US dollar price gap will increase the transaction cost of speculations and safeguard the basic stabilization of yuan's exchange rate, the central bank spokesman said.

The above measures will help banks to enhance their capabilities in deciding prices by their own, to manage price risks more effectively, to provide better services for clients through fair and orderly competitions, to manage and adjust yuan's exchange rate on the basis of market supply and demand and with reference to a basket of currencies, and to make full use of market in forming exchange rates and to avoid risks, the central bank said.

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