People’s Bank of China Loosens RMB Trading Band

April 17, 2012 Posted by China Briefing Reading Time: 2 minutes

By Xiaolei Gu

Apr. 17 – The People’s Bank of China (PBC) announced this past weekend that the renminbi’s (RMB’s) trading band would be widened from April 16, 2012, allowing the currency to rise or fall each day by as much as 1 percent from the official daily rate against the U.S. dollar.

The increased flexibility of the RMB’s trading band marks an important step towards a loosening fixed foreign exchange regime in China, which previously only allowed daily fluctuations of 0.5 percent on either side of the daily fixed price set by the PBC.

The PBC’s recent move has been well–received internationally, as China has long been criticized as a currency manipulator – keeping its exchange rate artificially weak to make Chinese exports more competitive. The widening of the RMB’s trading band by the government may lead to the possibility of unidirectional appreciation of the currency.

More importantly, this move illustrates China’s determination to further open up its economy as the RMB’s value against the U.S. dollar is now more aptly determined by market forces.

“[This move] underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate,” says Christine Lagarde, managing director of the International Monetary Fund.

Some analysts also say the move represents yet another step China has taken towards the internationalization of the RMB, as they believe more and more foreign trade will gradually shift away from U.S. dollars to be settled in RMB.

“I think Australian exporters need to be more and more aware of how the Aussie dollar is trading versus the Chinese currency, rather than just focusing on the Aussie versus the U.S., so it’ll be a gradual process,” says Sean Callow, senior currency strategist at Westpac.

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