Yuan Gets More Room to Float

China’s central bank will expand the daily yuan trading band against the dollar. The announcement came after first quarter economic data that China’s gross domestic product growth had slowed to 8.1%.  From China Daily:

The People’s Bank of China, the country’s central bank, said in a statement published on its official website that the floating band in the inter-bank spot foreign exchange market will be enlarged from 0.5 percent to 1 percent effective April 16.

To keep the exchange rate stable, the PBOC has set a daily reference rate for the yuan and it will be allowed to fluctuate only to the daily limit on either side of the reference rate. The trading range was widened to 0.5 percent from 0.3 percent in May 2007.

It also raised the spread between dollar selling and buying prices offered by the foreign exchange-designated banks to their customers to 2 percent of the reference rate, from the current level of 1 percent.

News of this announcement was widely supported by the International Monetary Fund (IMF) as it promoted market transparency and economic stability. From CBS Market Watch:

Christine Lagarde, managing director of the International Monetary Fund, welcomed the move.

“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.

The scale of the widening is bigger than the 0.7% the market had expected, according to Ting Lu, a China economist at Bank of America Merrill Lynch, in emailed comments.

Earlier this week, China Securities Regulatory Commission increased the quotas for foreign institutional investors from $30 billion to $80 billion. This move highlights a strategic economic shift from an export model to a consumption model. From Bloomberg News:

China, the world’s second-biggest economy, has pledged this year to free up control of the yuan and liberalize interest rates as the government deepens reforms to revive growth and offset slowing exports and a cooling housing market. China needs to rely more on markets and the private sector as its export- oriented model isn’t sustainable, World Bank President Robert Zoellick said in February.

“More action on opening up their markets to outside investment is definitely a positive,” Jeff Papp, a senior analyst in Lisle, Illinois at Oberweis Asset Management Inc., which oversees about $700 million, said in a phone interview. “It’s not a huge amount. They’re taking a small-steps approach to see how markets will react with more participants.”