This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2014/07/04/business/international/china-takes-step-toward-freeing-currency-from-state-control.html

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
China Takes Step Toward Freeing Currency from State Control China Takes Step Toward Freeing Currency from State Control
(about 4 hours later)
SHANGHAI — China has permitted banks to freely set their own exchange rates for the renminbi against the dollar in over-the-counter transactions — another step toward freeing the exchange rate from government control.SHANGHAI — China has permitted banks to freely set their own exchange rates for the renminbi against the dollar in over-the-counter transactions — another step toward freeing the exchange rate from government control.
Banks were previously required to price the exchange rate they offered clients within 3 percent in either direction of the Chinese central bank’s midpoint on a given day. Banks were previously required to price the exchange rate that they offered clients within 3 percent in either direction of the Chinese central bank’s midpoint on a given day.
The liberalization of the market implies that the central bank believes that the renminbi has “now reached equilibrium,” said Cao Yang, an analyst with Shanghai Pudong Development Bank. Such equilibrium permits the central bank to gradually free the currency’s exchange rate without worrying about excessive volatility, he said.The liberalization of the market implies that the central bank believes that the renminbi has “now reached equilibrium,” said Cao Yang, an analyst with Shanghai Pudong Development Bank. Such equilibrium permits the central bank to gradually free the currency’s exchange rate without worrying about excessive volatility, he said.
The new rules do not apply to the currency’s main rate in the interbank market, which is subject to controls including the central bank setting a daily midpoint from which the spot rate has been allowed to fluctuate in either direction by 2 percent since March. The new rules do not apply to the currency’s main rate in the interbank market, which is subject to controls including the central bank’s setting a daily midpoint from which the spot rate has been allowed to fluctuate in either direction by 2 percent since March.
Under the new policy, effective immediately, banks can price over-the-counter exchange rates “in line with market supply and demand and without any restrictions”, the People’s Bank of China said in a statement published late on Wednesday. The move “is aimed at further perfecting the mechanisms to establish market-oriented exchange rate for the yuan,” the central bank added.Under the new policy, effective immediately, banks can price over-the-counter exchange rates “in line with market supply and demand and without any restrictions”, the People’s Bank of China said in a statement published late on Wednesday. The move “is aimed at further perfecting the mechanisms to establish market-oriented exchange rate for the yuan,” the central bank added.
But the wholesale market that the banks trade in must still abide by the midpoint guidance rate. Because that primary market is an enormous source of currency supply and demand, posting around $15 billion in transactions every day, it will continue to exercise a strong influence on the consumer market.But the wholesale market that the banks trade in must still abide by the midpoint guidance rate. Because that primary market is an enormous source of currency supply and demand, posting around $15 billion in transactions every day, it will continue to exercise a strong influence on the consumer market.
China, the world’s second-largest economy, after the United States, is seeking to increase the use of the renminbi in global trade and investment to diminish China’s dependence on the dollar, and, by extension, its exposure to economic policy decisions made in Washington outside of its control.China, the world’s second-largest economy, after the United States, is seeking to increase the use of the renminbi in global trade and investment to diminish China’s dependence on the dollar, and, by extension, its exposure to economic policy decisions made in Washington outside of its control.
Allowing the market to price the renminbi against the dollar is a prerequisite for wider liberalization, and at the same time decreases the need for Beijing to accrue dollar reserves in the name of managing the exchange rate.Allowing the market to price the renminbi against the dollar is a prerequisite for wider liberalization, and at the same time decreases the need for Beijing to accrue dollar reserves in the name of managing the exchange rate.
The central bank has purposefully guided the yuan to stage more two-way trading over the past couple of years, letting the currency appreciate 2.9 percent versus the dollar in 2013, only to push it down as much as 3.4 percent this year to persuade the market not to consider the currency a one-way bet on appreciation.The central bank has purposefully guided the yuan to stage more two-way trading over the past couple of years, letting the currency appreciate 2.9 percent versus the dollar in 2013, only to push it down as much as 3.4 percent this year to persuade the market not to consider the currency a one-way bet on appreciation.
Chinese companies, which obtain foreign currencies both at the interbank market and, with a lesser degree, via banks’ over-the-counter channels, welcomed the move.Chinese companies, which obtain foreign currencies both at the interbank market and, with a lesser degree, via banks’ over-the-counter channels, welcomed the move.
“The opening will have a positive impact on corporate foreign exchange deals,” said Wang Xinjiu, securities affairs representative at the China International Marine Containers (Group), the world’s top container producer. “The opening will have a positive impact on corporate foreign exchange deals,” said Wang Xinjiu, securities affairs representative at the China International Marine Containers Group, the world’s top container producer.
“Companies, just like individuals, will have better channels to meet their foreign exchange demand with more reasonable exchange rates,” he said.“Companies, just like individuals, will have better channels to meet their foreign exchange demand with more reasonable exchange rates,” he said.
The latest step comes ahead of bilateral economic talks between the United States and China this month, during which American officials are expected to raise their concerns about Beijing’s interventions in the currency market.The latest step comes ahead of bilateral economic talks between the United States and China this month, during which American officials are expected to raise their concerns about Beijing’s interventions in the currency market.
Critics say China artificially suppresses the value of the renminbi to protect its exporters, an accusation China has always denied.Critics say China artificially suppresses the value of the renminbi to protect its exporters, an accusation China has always denied.
The United States Treasury secretary, Jacob J. Lew, who will attend the annual Strategic and Economic Dialogue in Beijing this month, said on Tuesday the renminbi’s value is a “very big issue” for the United States and that the currency needs to appreciate more. The United States Treasury secretary, Jacob J. Lew, who will attend the annual Strategic and Economic Dialogue in Beijing this month, said on Tuesday the renminbi’s value was a “very big issue” for the United States and that the currency needed to appreciate more.
Robert Minikin, a foreign exchange strategist in Hong Kong for Standard Chartered, said that he believed that Beijing was also preparing to change the way it managed the market in general, and that the freeing of the market could be a step in that direction.Robert Minikin, a foreign exchange strategist in Hong Kong for Standard Chartered, said that he believed that Beijing was also preparing to change the way it managed the market in general, and that the freeing of the market could be a step in that direction.
Economists have pointed out that so long as Beijing continues to set an official midpoint rate, it retains a tool for controlling the exchange rate; and so long as the interbank market is restrained by a trading band, the market is not truly in charge.Economists have pointed out that so long as Beijing continues to set an official midpoint rate, it retains a tool for controlling the exchange rate; and so long as the interbank market is restrained by a trading band, the market is not truly in charge.