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Chinese yuan weakens in first day of new trading range

April 16, 2012|By David Pierson
  • A Chinese bank clerk counts money.
A Chinese bank clerk counts money. (Zhong Min )

BEIJING -- China's yuan weakened against the dollar Monday, the first day it was allowed to fluctuate against the greenback within a wider range.

The exchange rate closed at 6.3150, down 0.3% from the 6.2960 daily fixing set by the central bank to open trading Monday.

The central bank said over the weekend that it would double the amount the exchange rate could rise or fall in a single day to as much as 1%. 

The move is aimed at introducing more volatility into the exchange rate to discourage speculators or capital inflows that could contribute to inflation.

The wider trading band also invites more market-oriented pricing of the yuan, which has long been accused of being undervalued to make Chinese exports more competitive.

Beijing has increasingly asserted that the yuan has reached market value, citing a large decline in its current account surplus.

China wants to eventually internationalize the yuan and promote it as a reserve currency so that it can reduce its reliance on the dollar for trade.

However, that likely won’t happen until China's leaders agree to let the free market determine the value of the yuan, also known as the renmenbi.

Under the current system, the central bank determines the exchange rate each business day using a basket of currencies as reference.

Still, economists and foreign officials said China's move to increase the trading band Monday was encouraging on both financial and political fronts.

International Monetary Fund chief Christine Lagarde called the expanded range an "important step" in rebalancing the Chinese economy toward domestic consumption.

A White House official said China has made progress in reforming its currency but that the U.S. wanted to see still more.

"The wider band lays the groundwork for a more market-driven and volatile exchange rate regime somewhere down the road,” said Mark Williams, chief Asia economist for Capital Economics in London. "Second, it signals that the policymaking process in Beijing continues to function, contrary to some suggestions that infighting ahead of the leadership handover was resulting in policy paralysis.

The yuan appreciated nearly 5% against the dollar last year. That pace is expected to slow to around 2% this year, analysts say.

A slowdown in the domestic economy and export demand from the West will challenge the country's important manufacturing sector, reducing the likelihood of significant yuan gains.

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