China Stretches Yuan’s Trading Band to Give it Greater Market Role

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Asian Currency, Stethoscope And Background Of Asian CurrencyChina sent another signal that it is reinvigorating its financial sector, despite the economic slowdown, by further reducing its hold on the yuan.

The yuan will, from Monday, be able to trade as much as 2 percent on either side of the daily central bank reference rate or parity rate, which is the daily benchmark for trading the currency against the U.S. dollar that is set by the People’s Bank of China.

Until today, China allowed investors to trade the yuan’s value 1 percent in either direction of the rate. The band was previously adjusted in April 2012 from 0.5 percent. Before then, it had earlier raised the rate from 0.3 percent in May 2007.

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The decision follows pledges by the Communist Party to allow the exchange rates to be controlled by market forces and encourage freer capital movements in and out of the country to facilitate investments.

“The fact that we’re starting to see investors want to express bearish views on the Chinese currency is really a sign that you’re getting a two-way market,” said Francois Du Pasquier, the head of foreign exchange at Citigroup Inc. “This is good news that the renminbi is starting to become a normal currency.”

The dollar traded at 6.152 at the close of trading last Friday, marking a 1.6 percent fall in the value of the yuan since the start of January. This is a radical decline for a currency whose value surged 2.9 percent in 2013, and has risen by more than 30 percent since it was re-evaluated in 2005, when China removed the currency’s 10-year old fix to the dollar.

To contact the reporter of this story: Jonathan Millet at john@forexminute.com