China has permitted banks to freely set their own exchange rates for the yuan against the dollar in over-the-counter transactions, another step toward freeing the exchange rate from government control.
Banks were previously required to price the yuan/dollar rate they offered retail clients within 3 per cent in either direction of the Chinese central bank's midpoint on a given day.
The new rules do not apply to the yuan/dollar's main rate in the interbank market, which is subject to controls including the central bank setting a daily midpoint from which the spot rate has been allowed to fluctuate in either direction by 2 per cent since March.
Under the new policy, effective immediately, banks can price OTC yuan/dollar exchange rates "in line with market supply and demand and without any restrictions", the People's Bank of China (PBOC) said in a statement published late on Wednesday.
The move "is aimed at further perfecting the mechanisms to establish market-oriented exchange rate for the yuan," the central bank said in the statement.
Allowing the market to price the yuan against the dollar is a pre-requisite for wider liberalisation, and at the same time decreases the need for Beijing to accrue dollar reserves in the name of managing the exchange rate.
The PBOC has purposefully guided the yuan to stage more two-way trading over the past couple of years, letting the yuan appreciate 2.9 per cent versus the dollar in 2013, only to push it down as much as 3.4 per cent this year to convince the market not to consider the currency a one-way bet on appreciation.
Banks were previously required to price the yuan/dollar rate they offered retail clients within 3 per cent in either direction of the Chinese central bank's midpoint on a given day.
The new rules do not apply to the yuan/dollar's main rate in the interbank market, which is subject to controls including the central bank setting a daily midpoint from which the spot rate has been allowed to fluctuate in either direction by 2 per cent since March.
Under the new policy, effective immediately, banks can price OTC yuan/dollar exchange rates "in line with market supply and demand and without any restrictions", the People's Bank of China (PBOC) said in a statement published late on Wednesday.
The move "is aimed at further perfecting the mechanisms to establish market-oriented exchange rate for the yuan," the central bank said in the statement.
However, the wholesale market that the banks trade in must still abide by the midpoint guidance rate. Because that primary market is an enormous source of forex supply and demand, posting around $15 billion in transactions every day, it will continue to exercise a strong influence on the retail market.
The world's second-largest economy is seeking to increase the use of the yuan in global trade and investment to diminish China's dependence on the US dollar, and by extension its exposure to economic policy decisions made in Washington outside of its control.
The world's second-largest economy is seeking to increase the use of the yuan in global trade and investment to diminish China's dependence on the US dollar, and by extension its exposure to economic policy decisions made in Washington outside of its control.
Allowing the market to price the yuan against the dollar is a pre-requisite for wider liberalisation, and at the same time decreases the need for Beijing to accrue dollar reserves in the name of managing the exchange rate.
The PBOC has purposefully guided the yuan to stage more two-way trading over the past couple of years, letting the yuan appreciate 2.9 per cent versus the dollar in 2013, only to push it down as much as 3.4 per cent this year to convince the market not to consider the currency a one-way bet on appreciation.
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