SAN FRANCISCO (MarketWatch) — China’s central bank will expand the daily yuan trading band against the U.S. dollar to 1% in either direction from 0.5% starting on Monday in a bid to support the economy and ward off a precipitous slowdown.
IMF lifts growth forecast, cautiously
The IMF has revised its forecast for 2012 global growth to reflect improving conditions, IMF managing director Christine Lagarde told The Wall Street Journal. Photo: AP
The move is targeted toward meeting market demands, promoting transparency, and enhance the flexibility of renminbi exchange rate,” said the People’s Bank of China in a statement on Saturday.
The announcement follows on the heels of data on Friday which showed that China’s first-quarter gross domestic product growth slowed to 8.1% from 8.9% in the previous quarter.
The pace was the slowest in 11 quarters as weak exports and sluggish construction activity took a toll on the world’s second largest economy. Read about China’s slower growth
“In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the renminbi exchange rate, keeping renminbi exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.” the central bank said in a statement.
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.
The renminbi-dollar rate USDCNY is close to equilibrium, and there is little room for renminbi-dollar appreciation so the central bank is under pressure to build up a new foreign exchange regime, Lu noted.
“A true rule-based basket currency regime will unavoidably lead to two-way volatility of renminbi-dollar, so the People’s Bank of China should seize all opportunities to gradually increase renminbi-dollar volatility,” Lu said. “However, China will avoid significant appreciation or depreciation this year due to uncertain global environment and the need for stability during the year of leadership change.”
China’s decision to widen the band is likely to prompt other Asian countries to calibrate their foreign exchange policies and have an impact on the dollar’s movements against the euro EURUSD according to currency strategists at Société Générale in their report.
The dollar firmed on Friday on a combination of tepid reading on U.S. consumer sentiment, rising Spanish debt yields and disappointing Chinese GDP data. The dollar index DXY which measures the greenback against a basket of six currencies, was last at 79.88. Read latest coverage of the U.S. dollar
“The official line is that the march toward liberalization goes on. Recently though, there has been more rather than less reserve accumulation in Beijing again, and the subplot must be that there is less desire as the economy slows, for the currency to go on appreciating,” said Kit Juckes, head of foreign exchange at Société Générale.
For economies such as China that rely heavily on exports to fuel economic expansion, a weaker currency helps to keep their products cheaper than competitors’.
Source Reference from: http://www.marketwatch.com/story/china-to-widen-daily-yuan-band-vs-dollar-to-1-2012-04-14
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