China

Floating exchange rate promotes yuan internationalization

English.news.cn   2012-04-16 10:51:24

 

Xinhua File Photo

By Xia Xiaopeng, Han Lin, Tang Danlu

BEIJING, April 16(Xinhuanet) - China's central bank decided on Saturday to widen the floating band of its currency the Renminbi yuan's trading price against the U.S. dollar, which was regarded as a great stride in promoting Renminbi internationalization.

In a statement published on its official website, the central People's Bank of China (PBOC) announced that the floating band in the inter-bank spot foreign exchange market will be enlarged from 0.5 percent to 1 percent effective April 16.

Previously, the bank set a daily reference rate for the yuan in order to keep the exchange rate stable, which will be allowed to fluctuate only to the daily limit on either side of the reference rate.

The trading range was widened to 0.5 percent from 0.3 percent in May 2007.

On April 13, yuan strengthened 5 basis points to 6.2879 against the U.S. dollar. Since China launched the exchange rate reform in 2005, the real effective exchange rate of RMB has risen over 30 percent, which is considered to have reached its equilibrious level.

PBOC governor Zhou Xiaochuan told Xinhua 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.

During the annual parliamentary session last month, Premier Wen Jiabao confirmed that China would continue to advance exchange rate reform to have yuan move in both directions by a larger margin.

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.

Meeting the demand of market development, widening the yuan's trading band aims to promote exchange of the Renminbi, boost its 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.

GOOD TIME FOR REFORM

The action is in line with market expectations, which will be beneficial to maintaining the stable development of China’s real economy and pushing forward the reform of exchange rate market, analysts noted.

Now is a good time to expand the spread, said Wang Tao, head of China economic research at UBS Securities Co Ltd.

"Since the ratio of China's current account surplus to GDP has dropped to below 3 percent, and is likely to remain at a low level," she added, "the yuan exchange rate should not still be seen as significantly undervalued. Appreciation expectation of the currency has weakened, and speculative capital inflows related to the yuan seem very small, too."

"A more flexible yuan will help better identify market supply and demand and promote [the yuan's] price to reach a balanced level, which will facilitate the exchange rate's reform," said Ding Zhijie, dean of the School of Banking and Finance with the University of International Business and Economics.

As a crucial step of the exchange rate reform, the expansion shows the government is relaxing its control and moves to let the market play a bigger role, Ding emphasized.

"Chinese authorities have started to gradually push forward opening-up of the capital account, which means that if the central bank hopes to maintain independence of monetary policy, it must allow more flexibility of the yuan," said Liu Ligang, head of China economics at the Australia and New Zealand Banking Group Ltd.

The two-way fluctuation of the yuan in the future, after the floating band expands, means companies will hedge foreign exchange trading risks, Liu said.

China's capital account is partially convertible, Sheng Songcheng, head of the statistics department at the People's Bank of China, told Xinhua, adding that opening the country's capital account would be helpful to Chinese enterprises bidding to expand globally at a time when global asset values are at a low level.

"By letting exchange rate act as a price leverage in allocating market resources, reforms in other sectors will also be liberalized," said Zhang Bin, a researcher at the Institute of Finance and Trade Economics under the Chinese Academy of Social Science.

In the past seven years after exchange reform since 2005, China has insisted on propelling the internationalization of RMB. It has successively allowed the cross-border Renminbi settlement, foreign direct investment in yuan and launched RMB Qualified Foreign Institutional Investors (RQFII) trials.

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Editor: Tang Danlu
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