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Foreign Exchange

China RMB band move likely to be first of many

Lawyers have predicted China’s central bank decision to widen the renminbi (RMB) trading band against the US dollar will prompt a continued and gradual loosening of trading band widths, according to the International Financial Law Review.

The People’s Bank of China (PBoC) announced on Saturday it was doubling the interbank foreign exchange market trading band of RMB against the US dollar, to 1% from 0.5%. It is the largest band widening, and has been widely seen as a step towards liberalizing the Chinese exchange rate and the creation of an internationally traded currency. FenXun Partners’ Xusheng Yang said the move highlighted the PBoC’s confidence in the long-term value of RMB and in its ability to effectively manage currency inflow and outflow.

“This move makes it clear the PBOC is not concerned about offshore RMB’s depreciation against the US dollar and remains confident in using its own foreign reserves to influence onshore exchange rates,” he said.

“It’s a good move that places China on the right track to addressing onshore and offshore RMB price discrepancies.”

Boss & Young’s Hubert Tse believed the eurozone financial crisis and US economic uncertainties had prompted an increased confidence in the Chinese economy.

“The timing of this is very significant,” he said. “It shows the Chinese government is on top of the economic situation. It is good progress.”

It was consistent with plans outlined in the country’s most recent five-year plan, he said, which stipulated authorities would continue to move forward to achieve a convertible currency by working to loosen cross-border RMB inflows and outflows.

Tse predicted a continued loosening of the RMB trading band. “This will be a gradual process to achieve eventual currency convertibility and capital account opening,” he said.

He expected the band to be opened wide enough to eventually close the gap with the overseas market.

The International Monetary Fund’s managing director Christine Lagarde welcomed the move in a statement released on Saturday.

“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,” she said.

Meanwhile, analysts have said the wider band gives the PBoC additional firepower at a time when the country is emphasizing the development of its financial services industry and lowering restrictions on capital flows across its borders.

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