BEIJING: Yuan was given a major thrust to become a global currency when China doubled its trading band against the dollar on Saturday. This step is deemed to liberalize its already emerging financial markets.
The People’s Bank of China stated that it would allow the yuan to rise or fall 1 percent from a mid-point every day, effective Monday, compared with its previous 0.5 percent limit.
Analysts state that this step highlights Beijing’s faith that the Yuan is near its equilibrium and that China’s economy is strong enough to cope with long-promised structural reforms.
Ahead of the International Monetary Fund meeting to be held next week in Washington, this step would also help in mitigating the criticism that China’s questionable currency policy usually faces.
A sluggish global economy that has trimmed investor expectations of a progressively growing yuan likely also gave Beijing the confidence to proceed, knowing that a larger band would not necessarily lead to a stronger currency.
“The central bank chose a good time window to enlarge the trading band. The market’s expectation for a stronger yuan is weakening,” said Dong Xian’an. The chief economist further stated that this step would also eradicate doubts over China administering a soft landing in its economy, hence making China’s reform road map.
As per the expectations of the investors, Yuan’s trading brand had to be widened by China and this has been all resulted in China reaching closer to it financial goal of having convertible Yuan by 2015.
Such a liberal currency would also improve Shanghai’s Status as a financial sector and it is deemed that the city would become a global banking heart by 2020.
“From April 16, 2012, the trading band for the Yuan against the Dollar in the spot interbank currency market will be widened from 0.5 percent to 1 percent,” the People’s Bank of China stated. The bank further stated that the “development of China’s foreign exchange market is maturing; the market’s ability to independently price and manage risks is growing by the day”.
The major aim of the Chinese government is to allow the currency to trade more freely so that it can compete strongly with the Dollar as a global reserve company.