The US and the IMF welcomed China’s decision to widen the trading band on the nation’s currency, while analysts downplayed yesterday the likelihood of wide swings in the value of the yuan.
The People’s Bank of China, China’s central bank, announced on Saturday that it would allow the yuan to fluctuate by up to 1 percent on either side of its trading band when markets open today.
The yuan is currently allowed to trade 0.5 percent on either side of a midpoint price set by the central bank every trading day.
The new rules came as pressure for the yuan to appreciate has eased substantially after recent data showed the country’s trade has become more balanced, analysts said.
The decision also followed data released on Friday showing the world’s second-largest economy grew at its slowest pace in three years during the first quarter, a development that calls for further policy easing.
IMF Managing Director Christine Lagarde described the move on the yuan as an “important step.”
“This 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,” Lagarde said in a statement.
Beijing’s trading partners have long criticized its yuan exchange rate, saying it is kept artificially low, fueling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.
The White House on Saturday reacted cautiously to the announcement, saying it would like to see “more movement.”
“They’ve made some progress, we’d like to see more movement. We noted this announcement. We’re reviewing it closely,” a top administration adviser, Ben Rhodes, told reporters on the sidelines of a regional summit in Colombia.
“It comes in the continuum of us wanting to see the Chinese take more of these steps to see their currency appreciate to come in line with the market value,” added Rhodes, the deputy national security adviser.
Chinese Prime Minister Wen Jiabao (溫家寶) acknowledged last month that the yuan had increased in value by about 30 percent since 2005 in comparison to the dollar.
The move to loosen the currency’s trading band could engender two-way volatility in the exchange rate, Bank of America-Merrill Lynch economist Lu Ting (陸挺) said. Lu said his bank expects the dollar-yuan exchange rate to be at 6.2 at the end of this year.
The yuan ended last week at 6.303 per US dollar, up about 8.3 percent since the scrapping in June 2010 of an almost two-year peg imposed during the global financial crisis. The currency has rallied 23 percent against the dollar in the past five years, the most among 25 emerging-market currencies tracked by Bloomberg.
The nation’s economy grew at a lower-than-expected 8.1 percent in the first quarter, compared with 8.9 percent in the fourth quarter of last year. Its trade surplus has also been shrinking in recent months, China recorded a US$5.35 billion trade surplus last month, reversing a US$31.48 billion deficit in February.
Tom Donohue, the head of the US Chamber of Commerce, said China’s decision to widen the yuan’s trading band may spur economic growth, boost the Asian country’s imports and strengthen the currency over time.
China’s move will “probably over the long-run help them in their economic growth even though there will be some competition involved,” Donohue said in an interview on Saturday on the sidelines of the CEO Summit of the Americas in Cartagena, Colombia. “It opens a lot of markets for them in both directions.”