Wider RMB trading band not to cause sharp market fluctuations

Edited and translated by People's Daily Online

The People’s Bank of China, the country’s central bank, announced on April 14 that it would widen the RMB’s trading band against the U.S. dollar in the foreign exchange spot market to 1 percent starting April 16. The trading band was last widened in May 2007 from 0.3 percent to 0.5 percent.

Analysts said that the broadening of the band is in line with current domestic and international financial and economic situations, and will accelerate the market-oriented reform of the RMB exchange rate and preserve the stability of China’s economy. A widened trading band will not cause sharp market fluctuations.

Widened trading band conducive to bringing the RMB exchange rate to balanced levels

The central bank said that the widening of the RMB trading band is to meet market demands, promote price discovery, and improve a managed, floating exchange rate regime that is based on supply and demand and operates in reference to a basket of currencies.

Financial expert Zhao Qingming said that the central bank’s move will bring the RMB exchange rate to balanced levels. The RMB has appreciated more than 30 percent against the U.S. dollar since China initiated the exchange rate reform, and the Chinese currency’s exchange rate is near equilibrium. A widened trading band is conducive to enhancing the flexibility of the RMB exchange rate and bringing the rate to balanced levels.

Industry insiders noted that the broadening of the RMB trading band will promote China’s market-oriented exchange rate reform, and push forward the country's economic reforms as a whole. The move underlines the central bank’s determination to reduce intervention and allow market forces to play a greater role in determining the level of the exchange rate. A more flexible RMB will help better identify market supply and demand, and push the RMB price toward a more balanced level.