China widens renminbi daily trading band

IT HAPPENED quietly, without any fuss, but it is one of the most significant events of the year in terms of China’s currency.

Last week, the People’s Bank of China widened the renminbi’s daily trading band with the dollar to +/-1 per cent.

“The immediate impact of a wider renminbi trading band on the exchange rate will be small, we suspect, but the reform is an important signal of renewed momentum behind economic policy liberalisation,” said Mark Williams, chief Asia economist at Capital Economics.

The renminbi touched the edges of the previous +/- 0.5 per cent band on only a handful of occasions over the past few years, so the trading band has not constrained the renminbi’s movement.

Another interesting aspect about the policy shift is that it proves that decisions are still being made within the political structure in Beijing.

It had been thought that there would be policy stasis ahead of the leadership handover which starts in the autumn.

“There have been a flurry of recent reforms affecting the renminbi and the broader financial sector, all of them pointing in the direction of more liberalisation,” Mr Williams added. “For now at least, momentum appears to be with the reformers.”

Brian Jackson, emerging markets strategist at RBC, said the wider trading range showed Beijing was now more comfortable with greater daily volatility in the exchange rate and also suggested officials were trying to signal indefinite renminbi appreciation should no longer be assumed.

“By allowing more daily volatility, Beijing may now be indicating that two-way moves in US dollar/renminbi over a longer time-frame are now feasible,” he said.