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China’s Central Bank Raises the Volatility of Its Currency China’s Central Bank Allows Its Currency More Volatility
(about 3 hours later)
SHANGHAI — On Saturday, China’s central bank doubled the daily range in which the nation’s currency, the renminbi, could trade, underscoring efforts to add volatility and risk to the currency to make it more responsive to market forces. SHANGHAI — In the latest sign that China is loosening its tight grip over the economy, the government said on Saturday that the value of its currency would now be allowed to fluctuate more widely against the United States dollar.
The People’s Bank of China said the exchange rate would be allowed to rise or fall 2 percent from a daily midpoint rate it sets each morning. The change goes into effect on Monday. China’s Central Bank said in a statement on its website that beginning on Monday, the daily trading band on the Chinese currency, the renminbi, would double to 2 percent on either side of a government-set parity rate, a move that could lead to wider daily price fluctuations. The announcement is the latest indication that Beijing is determined to make the renminbi an international currency and to give market forces a larger role in what is now the world’s second-largest economy after the United States’.
The central bank doubled the trading band to 1 percent from 0.5 percent in April 2012. Although the government still maintains tight control over large aspects of the economy, including interest rates and the exchange rate, there appears to be a growing recognition among policy makers that the state’s heavy-handed role is distorting prices, intensifying inefficiencies and giving an unfair advantage to state-run enterprises, government banks and exporters.
Many market participants have long viewed the renminbi, also known as the yuan, as a one-way appreciation bet. Authorities are trying to change that by demonstrating that it is now more of a genuine market that can go up and down like any other. Widening the daily trading band on the currency is likely to reduce the government’s control over the price of the renminbi and to signal to investors and businesses that even bolder moves are imminent.
“This is a major step toward building more market-oriented exchange rate mechanisms in China, signifying a gradual withdrawal by the central bank from regular intervention in the foreign exchange market,” said Fu Qing, head of foreign exchange trading at Standard Chartered Bank in Shanghai. “This is a fairly significant indication of the government’s commitment to market-oriented reforms,” said Eswar S. Prasad, a professor at Cornell and a former head of the International Monetary Fund’s China division. “The government has been intervening in the currency markets for some time, but this means they will probably intervene less.”
“However, with more volatility in the yuan’s exchange rate created by the reform, Chinese companies will face an uphill task learning how to hedge their currency risks.” Although China’s economy is growing at close to 7 percent, the rate of growth has fallen sharply over the last few years, and there are concerns that banks and local governments are masking huge liabilities. To lower the risk of a serious downturn, and to strengthen the country’s long-term prospects, Beijing is trying to push through market reforms without severely damaging those who have benefited most from state dominance of the economy.
The widening of the band was broadly expected after the renminbi fell in value from mid-February. Traders suspected that the central bank, working through state banks, had pushed the currency down to try to force those speculating on appreciation to unwind their positions. The idea was to leave the market more balanced between buyers and sellers to reduce the chances of extreme moves once the trading band was widened. Under President Xi Jinping, the government has stepped up plans to liberalize interest rates; to open the country’s capital account, allowing more capital to flow in and out of China; and to reform the financial system.
The central bank guided the renminbi to rise 2.9 percent against the dollar in 2013, far outperforming other emerging economy currencies and surprising markets. The government recently said that it planned to allow more private banks to operate in the country. One official also said that within two years, China planned to free up bank deposit rates, which for years have punished savers with returns sometimes below the rate of inflation. By widening the daily trading band, the government is signaling it plans to reduce its role there, too.
Since the beginning of 2014, however, the currency is down 1.6 percent. The government still has the power to set the daily parity rate, and it could prevent big swings in the value of the renminbi.
“The People’s Bank of China will continue to increase the two-way flexibility of the renminbi exchange rate, keeping the exchange rate fundamentally stable within reasonable and balanced levels,” the bank said in a statement on its website.
Analysts said permitting the renminbi to trade in a wider range each day and respond more to market forces would make the currency more attractive internationally.
“China needs to internationalize the yuan, and a 1 percent fluctuation cannot adequately reflect market demand for and supply of the yuan,” said Li Huiyong, an analyst at Shenyin Wanguo in Shanghai. “That the central bank chose to widen the band right now shows, in some ways, that it is confident about the economy.”