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Print Edition> Business
UPDATED: April 23, 2012 NO. 17 APRIL 26, 2012
Wider Trading Limit
China is determined to advance exchange rate reform and improve the yuan's pricing mechanism
By Liu Xinlian

MORE FLEXIBLE: China's central bank expanded the yuan's trading band against the U.S. dollar from 0.5 percent to 1 percent on April 16 (XINHUA)

Aside from meeting overseas clients, exhibitors at the 111th Canton Fair, China's biggest export fair which kicked off on April 15 in southeast China's Guangdong Province, were also concerned with the new move in the yuan-dollar trading band.

On April 16, the People's Bank of China, the central bank, widened the trading band for the yuan against the U.S. dollar to 1 percent from 0.5 percent.

"The yuan will witness more fluctuations in the future. We must get ready for that," said Gao Yuanjia, General Manager of Chunlan Import and Export Co. Ltd., an air conditioner maker and exporter based in east China's Jiangsu Province.

In the foreign exchange spot market, Chinese banks can exchange the yuan 1 percent above or below the central parity against the U.S. dollar announced by the China Foreign Exchange Trading System each trading day. Previously, the daily trading limit was set at 0.5 percent.

This is the first time China has widened its trading band against the greenback since 2007.

Adjusting to market demand, widening the yuan's trading band aims to promote the currency's exchange, boost its two-way fluctuation flexibility and improve the market-based managed floating exchange rate regime tied to a basket of foreign currencies, said the central bank.

"A more flexible yuan will help identify market supply and demand and promote the yuan's price to reach an equilibrium level, which will facilitate the exchange rate reform," said Ding Zhijie, Dean of the School of Banking and Finance at the University of International Business and Economics.

It is considered a symbolic move by the central bank, as the widening of the trading band implies the trend for the yuan's one-way appreciation has come to an end.

The move has unveiled China's attempts to speed up market-based currency exchange rate reform. But it also means more trading risks for its exporters and banks.

Right timing

"The central bank's move has been much anticipated for a long time," said Lu Zhengwei, chief economist of the Industrial Bank based in southeast China's Fujian Province.

In the past seven years after the exchange rate reform since 2005, China has insisted on propelling the internationalization of the yuan.

It has successively allowed yuan settlement in cross-border trade, foreign and outbound direct investments, and launched the pilot program of RMB Qualified Foreign Institutional Investors.

The yuan's value increased some 30 percent against the U.S. dollar since 2005.

The move came as China's shrinking trade surplus has eased the yuan's appreciation expectation, said Lian Ping, chief economist with the Bank of Communications.

The country saw a trade deficit of $31.48 billion in February, the largest monthly deficit in a decade, making trade surplus narrow to $670-million in the first quarter, compared with $2.22 billion during the same period of last year.

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

Since the ratio of China's current account surplus to the GDP has dropped to less than 3 percent and is likely to remain low, the yuan exchange rate against the U.S. dollar should not still be seen as substantially undervalued, said Wang.

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