China eventually wants to internationalize the yuan and promote it as a… (Eugene Hoshiko, Associated…)
BEIJING — China has widened the daily trading range for the yuan in another small step to liberalize its currency.
The move, effective Monday, allows the yuan to rise or fall in a single day as much as 1%, double the previous limit. The effort signals a willingness by China to allow its currency to move with market forces. That could help appease trading partners who have long accused Beijing of keeping the yuan artificially weak to give its exporters an advantage over foreign competitors.
On Monday, the yuan weakened against the dollar, closing at 6.3150, down 0.3% from the 6.2960 level set by the central bank to open trading.
China eventually wants to internationalize the yuan, also known as the renminbi, and promote it as a reserve currency so that it can reduce its reliance on the dollar for trade.
However, that probably won't happen until China's leaders agree to let the yuan float freely.
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.
International Monetary Fund chief Christine Lagarde called the expanded range an "important step" in rebalancing the Chinese economy toward domestic consumption. A stronger yuan would help to keep inflation in check and make imports cheaper for Chinese consumers.
A White House official said China had made progress in reforming its currency but that the U.S. wanted to see more. Some economists were encouraged by the move at a time when China's Communist Party is preparing for its once-a-decade leadership change this year.
"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 hand-over was resulting in policy paralysis."
The yuan appreciated nearly 5% against the dollar last year. That pace is expected to slow to about 2% this year, analysts say.
A slowdown in export demand from the West will challenge the country's important manufacturing sector, reducing the likelihood of significant yuan gains in 2012.