China will use prices from interbank trading to set the yuan's rate from tomorrow, a step toward market-based pricing for the currency.
The central bank is ending its role as the sole counterparty in all yuan trades, designating banks including Citigroup Inc and HSBC Holdings Plc as market makers. The People's Bank of China (中國人民銀行) said in a statement yesterday that it will release a daily fixing rate at 9:15am Beijing time based on quotes from these lenders.
US and European lawmakers have called for China to allow more exchange-rate flexibility, arguing that an artificially weak currency gives the nation's exporters an unfair advantage. While China's central bank is creating a market for a more freely traded currency, the new system won't stop it from selling the yuan and limiting capital flows to keep it weak.
"It's an incremental step to develop its foreign-exchange market and make its currency more transparent," said Tony Norfield, global head of currency strategy at ABN Amro Holding NV in London.
"The central bank has been heavily involved in the market and will probably still intervene," Norfield said.
China on July 21 reset the yuan's value at 8.11 to the US dollar, a 2.1 percent appreciation from the pegged level where it had been held since 1995, and started managing its value against a basket of currencies including the euro and yen. The central bank has since limited gains in the yuan to 0.5 percent against the US dollar.
The yuan is allowed to move as much as 0.3 percent against the US currency either side of the daily fixing rate. The maximum is 3 percent versus the euro, yen and other currencies.
The central bank will maintain the current trading bands even after the new fixing rate is in use, the statement said yesterday.
"Gradualism is key and we're seeing that," Marios Maratheftis, a currency strategist at Standard Chartered Plc, said in London.
"It's a more efficient system. It has no implications for any imminent change in the currency" exchange rate, he said.
China has rejected criticism it isn't moving fast enough make its exchange rate more flexible.
Chinese Premier Wen Jiabao (溫家寶) on Dec. 12 said the rate was "properly adjusted this year and takes into account effects on the country's neighbors and the world."
The country will need stronger measures that allow for a faster appreciation in the yuan to damp criticism from the US, analysts such as Joseph Tan at Standard Chartered Bank said.
"It's not exactly headline grabbing," Tan, a Singapore-based economist at Standard Chartered, said of yesterday's changes.
"If China wants to fend off political pressure, it would have to say it wants a more significant yuan appreciation," he said.