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Why China will keep its grip on the Yuan
In an effort to move closer to a market-determined exchange rate, China has doubled the Yuan’s daily trading band. This is the third time China has widened the trading band during the last seven years. The daily limit which previously stood at 0.3 percent in May 2007 has now been increased to 2 percent.
John Hardy, Saxo Bank’s Head of Forex Trading, notes that China needed to widen the band in order to reinstate control over the currency. Ending the dollar-yuan carry trade was, partly, a reason for the reform. The move also reflects increased uncertainty in the currency, which prevents investors from relying on the currency’s monitored upward trajectory.
Most analysts had anticipated the widening, as China continues to support the central bank’s long-term goal of a market-driven exchange rate. International trade is likely to increase with the People’s Bank of China’s doubling of the daily trading band. Recently Yuan hubs for investors have opened in London, Singapore, and Taiwan. Hardy still believes though that it will be years before the Yuan is allowed to float saying that it will not occur in, “the foreseeable future.”.
02:06 minutes
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