China to expand currency trading band
September 12, 2005
Beijing - A senior Chinese central bank official said on Friday that expanding the currency's narrow trading band should be expected although no hint was given as to when it may occur.
"With the greater change of the adjustment measure, the scope (of trading) should expand," Ma Delun, assistant governor of the People's Bank of China, said at business forum here.
"The direction of the renminbi (yuan) exchange rate reform is to maintain an effective flexible exchange rate regime along with a socialist market economic system," he said.
The yuan is now linked to a trade-weighted basket of major currencies after a 2.1 percent revaluation of the yuan to 8.11 per dollar in July.
The currency can fluctuate against the dollar by 0.3 percent above or below its previous close, and can move 1.5 percent against other currencies in the basket, including the euro and the yen.
While China has promised further reform to its currency system, Ma reiterated the central bank's standard line of keeping the yuan basically stable.
It would seek to reduce volatility by intervening in the market, he said.
Although China may have delinked its decade-long peg to the dollar, marking a clear change in policy, the central bank has kept a tight lid on the yuan's daily trading range.
On Thursday, the yuan closed at 8.0945 to the US dollar
Concerning the composition of the yuan's currency basket, Ma only added that the formula was "complicated," taking into account the nation's external trade and debt position, as well as other macro-economic factors such as the M2 money supply figures.
Ma went on to say that eventually the central bank will allow market forces to play a greater role in the currency regime.
"The goal is to establish a managed floating exchange regime to facilitate the basic balance of our external trade and services and facilitate the convertibility of our capital account."
However, domestic companies need time to adjust to the new system, with many already facing "great challenges" from the July move.
"After this period, as time passes, market supply and demand will play an even bigger role in deciding the exchange rate," Ma said.
China would also move ahead with plans to ease controls on the yuan through the currently closed capital account.
Restrictions on capital inflows would first be eased and then greater capital outflows allowed, he said. Again, no timetable was given. - AFP
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