China Doubles Yuan’s Daily Trading Band

CHINA’S DOUBLING OF the daily trading band within which its currency can move is another cautious step towards letting market forces play a larger role in the economy. The People’s Bank of China says the exchange rate will be allowed to move 2% above or below the midpoint range it sets each day against the U.S. dollar.

The last time the band was widened, in April 2012, it was doubled from half a percent to one percent. This latest move will be seen within China as being more ambitious than it will be seen outside of it. On what there will be agreement is that it is another step towards the yuan becoming fully convertible — though it has a long way to go even to challenge the dollar let alone eclipse it.

It is also a sign that policymakers have confidence that the economy, though experiencing slowing growth, remains strong enough to enable the continuing drive towards financial reform. Greater exchange rate fluctuations may also deter hot money inflows, allowing the central bank to tighten monetary policy to throttle rapid credit expansion. They will also increase the demand for the introduction of financial products that can be used for currency hedging.

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