China Widens Trading Band for Yuan

China , Currencies , US Dollar Apr 16, 2012 No Comments

Yuan vs. DollarThe Chinese government has agreed to loosen controls somewhat on the yuan and let it fluctuate more widely. As a result, Chinese goods may become more expensive, especially if growth in the yuan’s value accelerates, Purchasers need to keep a close eye on the Chinese currency, and would be well advised to consider looking elsewhere for cheap products. if it starts rising sharply.

Over the week-end, the People’s Bank of China (PBOC) took another step in the process towards the yuan to the status of a convertible currency by announcing a doubling of its daily trading range.

From today, the Chinese currency will be allowed to rise or fall by 1% each day from its central rate against the greenback. Its fluctuation, upward or downward, was limited until now to 0.5%.

Announcements of the Chinese central bank were welcomed in the United States where an adviser to the White House, Ben Rhodes, said they were in line with U.S. demands for a revaluation of the yuan.

“Progress has been made,” he said, before indicating that Washington wanted to see more.

Christine LagardeInternational Monetary Fund Executive Director Christine Lagarde has in turn felt that this decision “confirmed the commitments of China for a rebalancing of its economy toward domestic consumption and allow market forces to play a greater role in determining the exchange rate. ”

The question of the dollar/yuan is a sensitive issue in relations between China and the United States which is accusing Beijing to keep its currency artificially low to support its exports.

The Sino-US relations, especially on the issue of currency, are also a crucial issue in the U.S. election campaign.

The yuan is close to balance. We expect it grew by only 1.4% this year against the dollar, so the time is well chosen to widen the band,” said Lan Shen, economist at Standard Chartered Bank.

Growth of the Chinese economy in the first quarter fell to its lowest level in nearly three years.

“The central bank has chosen the right window of opportunity to widen the trading band. Market expectations of a yuan revaluation were beginning to ease,” said Dong Xian’ab, chief economist at Peking First Advisory.

“This decision raises doubts on the part of China‘s ability to overcome the slowdown in its economy while giving a clear picture of its road map.”

This reform of the status of the yuan is also to be put in relation with the fact that China seeks to transform Shanghai into a global financial center. This objective can be achieved if Beijing eases restrictions surrounding its currency.

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Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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