China doubles yuan trading band, seen as sign of confidence

Sat Mar 15, 2014 10:57am EDT
 
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By Pete Sweeney and Lu Jianxin

SHANGHAI (Reuters) - China's central bank loosened its grip on the yuan on Saturday by doubling the daily trading range for the currency, adding teeth to a promise it would allow market forces to play a greater role in the economy and its markets.

Analysts said the move was a sign of confidence that the central bank had successfully fought off a plague of currency speculators, and at the same time signaled that regulators believe the economy is stable enough to handle more promised reforms going forward.

But as far as Beijing's project to encourage the international usage of the yuan is concerned, there is less consensus, with some warning that more volatility could discourage firms from using the yuan in the short run.

The People's Bank of China (PBOC) said the exchange rate will be allowed to rise or fall 2 percent from a daily midpoint rate it sets each morning. The change is effective from Monday.

"This is a major step towards building more market-oriented exchange rate mechanisms in China, signifying a gradual withdrawal by the central bank from regular intervention in the foreign exchange market," said Fu Qing, head of foreign exchange trading at Standard Chartered Bank in Shanghai.

"However, with more volatility in the yuan's exchange rate created by the reform, Chinese companies will face an uphill task learning how to hedge their currency risks."

Many market participants have long viewed the yuan as a one-way appreciation bet. Authorities are trying to change that by demonstrating that it is now more of a genuine market that can go up and down like any other.

"The People's Bank of China will continue to increase the two-way flexibility of the renminbi exchange rate, keeping the exchange rate fundamentally stable within reasonable and balanced levels," the PBOC said in a statement on its website.   Continued...

 
A woman counts Chinese yuan notes at a market in Beijing, July 1, 2013. REUTERS/Jason Lee