Chinese renminbi records biggest rise against dollar

The Chinese currency has recorded its biggest single-day rise against the US dollar, raising expectations that Beijing will sanction increased flexibility for the closely managed renminbi.

The currency, which has been kept on a tight leash since a small one-off appreciation in July last year, rose by 0.24 per cent before falling slightly to close trading at Rmb7.98 to the dollar.

The rise yesterday followed a relatively sharp weakening of the renminbi on Tuesday, for the first time nearly hitting the 0.3 per cent daily fluctuation limit against the dollar set last year.

The increased volatility is in line with China's prime, short-term policy goal of building a genuine foreign-exchange system in which a flexible renminbi rises and falls in tandem with market signals. In the longer term, it portends a stronger renminbi, which the US and other big trading partners have demanded as a way to rein in China's swelling trade surpluses. However, there is little sign Beijing is ready to sanction a rapid rise of the currency much beyond the present rate of appreciation of about 3 per cent a year.

The renminbi has appreciated by only about 1.7 per cent against the dollar since Beijing's appreciation of 2.1 per cent last year, along with the decision to break a decade-old peg to the dollar.

A marginally higher exchange rate would be unlikely to have much effect on China's surpluses with the US and Europe because much of the trade is dominated by the "processing" of goods in which China is the final point of assembly in Asia.

However, a more flexible currency could affect the economy as it would free the People's Bank of China, the central bank, to press for greater use of interest rates to manage the business cycle and credit demand.

The bank said in a report this month that while international imbalances could not be resolved solely through reliance on renminbi appreciation, a more flexible currency could help restructure the economy.

"As part of a package of measures, the exchange rate can play a certain role in addressing the imbalance in international payments," the bank said.

Some economists predict the central bank will widen the daily fluctuation limit for the renminbi to allow more flexibility.

Widening the trading limits would underline the element of two-way risk in foreign exchange trading, which the central bank believes is poorly understood in China.