BEIJING - The People's
Bank of China (PBoC), China's central bank,
announced September 23 that it would increase the
float range of the yuan's exchange rate against
non-US dollar currencies from the previous 1.5% to
3%. In other words, the exchange rate of the yuan
against, for example, the yen or the euro will be
allowed to change a maximum of 3%, up or down, in
one trading day.
The bank, however, did
not change the float range of the yuan against the
US dollar in the inter-bank foreign exchange
market. After China abruptly allowed its currency,
the yuan, to appreciate by a modest 2.1% on July
21, the trading price between US dollars and yuan
has been permitted to fluctuate within 0.3% in
the
inter-bank foreign exchange market, and the
trading price between non-US dollars and yuan can
fluctuate within 1.5%.
According to a
circular issued by the central bank recently on
the management of trading prices in the inter-bank
foreign exchange market, the gap between the
selling and purchase price of US dollars in spot
exchange cannot exceed 1% of the trading middle
price, and the gap between cash selling and
purchase price cannot exceed 4% of the trading
middle price. Banks can adjust the daily posted
price of US dollars within the regulated price
range, according to the circular, which abolished
the limit on the gap range concerning non-US
dollar prices posted by clients. Banks can decide
the prices between non-US dollar currencies and
the yuan by themselves, according to the circular.
The above measures will help banks to
determine prices internally, to manage price risks
more effectively, to provide better services for
clients through fair and orderly competition, to
manage and adjust the yuan's exchange rate on the
basis of market supply and demand with reference
to a basket of currencies, and to make full use of
market mechanisms in forming exchange rates and
managing risk, the central bank said.
Loosening the controls over the posted
price gap will increase the transaction costs of
speculators (because the fees that must be paid
for an exchange transaction will be determined by
the banks, not by government fiat) and help to
stabilize the yuan's exchange rate, the central
bank said.
The PBoC and the State
Administration of Foreign Exchange will continue
the reform of the yuan exchange rate regime in an
active, controllable and gradual way, so as to
make the exchange rate regime more flexible, while
still maintaining the yuan exchange rate's basic
stability at a reasonable equilibrium, the central
bank said.
Facts show that the reform on
the Chinese yuan exchange rate thus far has
basically reached its goal of building a more
flexible yuan exchange rate forming mechanism. The
trading price of the yuan, published by the
People's Bank of China September 21, closed at a
rate of 8.0911 to the US dollar, 189 basis points
higher than two months ago, when the reform of the
yuan to US dollar pegging system was initially
launched.
Change announced by PBoC vice
president The policy change was announced
by Hu Xiaolian, deputy governor of China's central
bank, who made the remarks at a seminar hosted by
JP Morgan Chase in Washington while was attending
the annual meeting of the International Monetary
Fund and the World Bank.
"This move
doesn't mean [there will be a] fundamental change
of [the] yuan exchange rate formation mechanism,"
Hu said. She added that expanding the floating
band of the yuan rates against non-dollar
currencies is intended to give more room for
commercial banks to control risk and wipe out
arbitrage opportunities. "In response to some
problems experienced by banks in their quoting
rates to clients, some adjustments [were] made to
expand the buying-selling rates spread, which is
now basically consistent with other countries'
practice in the range of quotation rates," she
said.
"This move serves to give commercial
banks more discretion in pricing so that they can
effectively balance the return with cost and
manage risks," Hu added. She said that the move
may also increase transaction costs of
speculators, thus contributing to maintaining the
yuan exchange rate basically stable. Hu said that
the move, a technical step to improve the yuan
exchange rate management mechanism, is in the long
term conducive to allowing market forces to play a
bigger role in deciding exchange rates, and will
facilitate risk management by financial
institutions and enterprises.
Background to the policy
change This latest move is believed to be
China's way of demonstrating its reform stance
ahead of the meeting of Group of Seven finance
ministers and central bankers scheduled for
September 30.
The yuan has been moving in
lockstep with the dollar as a result of market
interventions by Chinese monetary authorities. But
in certain hypothetical situations, such as a
several-percent fall of the dollar against the yen
in a given day, the yuan's movement in regards to
the yen would still be limited to 1.5%, resulting
in a market distortion, which could provide an
opportunity for speculation. In fact, on September
2, the yuan weakened 1.4% against the euro,
highlighting the difficulties in keeping daily
shifts against non-dollar currencies within the
1.5% band.
The yuan's existing narrow band
against the greenback, of up or down 0.3% in a
market day, will remain unchanged. The Chinese
central bank has kept the yuan's daily
fluctuations against the dollar at 0.1% or less
since July 21, and is not likely to allow sharp
deviations anytime soon. The PBoC also said that
it will raise by 2.5 times the cap on commissions
that banks can charge customers for yuan and
dollar transactions.
Under the previous
commission framework, a move in the yuan of plus
or minus 0.3% versus the dollar threatened to
result in losses that banks would not be able to
cover with commissions alone. The higher cap is
expected to make it easier for banks to cope with
wider yuan movements against the dollar.
Japan, US call for wider yuan-dollar
band Japanese Finance Minister Sadakazu
Tanigaki and US Treasury Secretary John Snow
agreed at a September 23 meeting that China should
set a wider range for its currency, the yuan, to
move against the dollar. They called the yuan's
2.1% revaluation against the greenback in July a
positive action, but said the actual fluctuations
in Chinese currency's exchange rate have been
insufficient.
Tanigaki and Snow met ahead
of a meeting of finance ministers and central bank
governors from the Group of Seven nations. The two
men shared the view that the Chinese currency
system needs further reform, with Snow urging
China to move faster.
A Japanese official
said Tanigaki referred to the new foreign exchange
system and said China "has been managing the
system in a conservative manner for now". It will
take some more time for China to make itself more
"familiar" with the system, he added.
In
the one-hour meeting, Tanigaki and Snow did not
discuss in detail China's decision the same day to
widen the yuan's trading band against currencies
other than the dollar, according to a Japanese
official. However, Tanigaki later described the
decision by the People's Bank of China as a
"technical issue," saying, "It's not so
significant from the viewpoint of the overall
currency system or mechanism."
