China Currency Gets More Freedom start

China Doubles Currency Trading Band

First Published Date: April 19, 2012 ADawnJournal.com

China took another step towards the future to make its currency globally compatible on Saturday, April 14, 2012. The Chinese government announced that it will increase the trading band or range in which the renminbi (or the yuan) can trade against the dollar from 0.5 percent to 1 percent.

The fluctuation will still be done against a fixed benchmark, and this benchmark is set by the central bank. However, allowing it to fluctuate from 0.5 percent to 1 percent will increase China’s currency role in the global financial markets.

Although the U.S. has been demanding more currency freedom from China to ease its unfair advantage to exporters in China, this doubling the size of the renminbi’s trading band against the dollar may not work the same way as the U. S. is expecting.

The yuan increased about 4 percent in 2010 and about 5 percent in 2011. Many Chinese leaders believe that the yuan is close to an equilibrium. The yuan’s outlook among investors in the offshore non-deliverable forward market is not rosy and it is believed that there is room for the currency to depreciate. Also, as China is going through the slowest economy in a decade, Beijing is willing to concentrate more on its domestic economic growth than foreign export. A more flexible currency may give Chinese exporters more room to maneuver, making the currency lower than going higher.

As China wants to see the yuan as a global reserve currency and Shanghai as global financial and banking centre, the Chinese government is gradually allowing its currency to trade more freely and expect more moves from the Chinese government to achieve its dreams.