China's decision to allow the renminbi to trade in a wider range against the US dollar will helpboost exports and improve use of the currency globally, experts said.
On Friday, the State Council released a policy document, which indicated that the flexibility of therenminbi exchange rate would be enhanced to keep it stable and at an adaptive and balancedlevel. It, however, did not provide a timing or scope for the potential adjustment.
Wang Shouwen, vice-minister of commerce, said the steps seek to improve the exchange ratemechanism and expand the scale of yuan trade settlements. Currently, a number of countriessuch as the United States, the United Kingdom and Japan use the exchange rate as an importanttool to boost exports. Most of these countries have allowed their currencies to devalue, which inturn has led to a sharp appreciation of the renminbi and seriously affected China's exportcapabilities.
The real effective exchange rate of the renminbi appreciated by 6.4 percent on a year-on-yearbasis in 2014 and rose by 4.2 percent in the first quarter of this year, according to a foreign tradereport published by the Beijing-based Chinese Academy of International Trade and EconomicCooperation in June.
As China's foreign trade already accounts for a sizable chunk of global trade, the nation may findit difficult to enhance its share further, the report said.
China's exports may see medium or low growth and experience more frequent and strongerfluctuations, and become more vulnerable to impacts from short-term factors like exchange rateswings and dwindling demand.
"Relevant financial institutions will be encouraged to develop more suitable exchange ratehedging tools for the development of the economy and to help Chinese manufacturers avoidexchange rate risks," said Wang.
The European Central Bank has implemented a large-scale quantitative easing policy sinceMarch 2015. The Bank of Japan is also following the quantitative easing policy.
The onshore renminbi in the China (Shanghai) Pilot Free Trade Zone is able to diverge up to 2percent on either side of the daily reference rate set by the central bank. The band was lastexpanded in March last year from 1 percent, and before that doubled from 0.5 percent in April2012.
He Jingtong, a professor of economics at Nankai University in Tianjin, said even though thedocument did not give the exact timing and scope, it shows that the Chinese government isaware that the country's foreign trade development is confronting more challenges such asweakened traditional competitiveness, flagging external demand and increased restrictions.
China's foreign trade stood at 11.53 trillion yuan ($1.86 trillion) in the first half of this year, downby 6.9 percent from the same period a year ago.
The yuan's exchange rate remained stable in the first half, said Wang Chunying, spokeswomanfor the State Administration for Foreign Exchange. The daily fix of the yuan-to-US dollarexchange rate, controlled by the central bank, has appreciated by 0.09 percent in the first sixmonths, said Wang.
"Enhancing the flexibility of the yuan exchange rate will help accelerate development of theforeign exchange market and policymakers should be prepared for risk arising from largerfluctuations while allowing the two-way trading of yuan," she said.
Wang Yongli, former vice-president of Bank of China Ltd, said that expanding the yuan's tradingrange is a step that will deepen exchange rate reform and enable the transition to a more market-determined system.
"The reform will increase fluctuations in the exchange rate and increasepotential risks in the market," he said.
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