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Yuan Volatility Grows with New 2% Range

The last few weeks have shown that China is trying to move towards a market driven economy. How long and how far China will follow this new policy remains to be seen but major news in regards to the policy changes seem to becoming weekly. While last week brought us the first default of a domestic corporate bond this week the PBOC has doubled the daily range in which the yuan can trade. The bank expects this to make the currency more attractive to foreign investors The bank has stated that it plans to continue increasing the range at which the yuan can trade in a way that is reasonable to keep the exchange rate fundamentally stable.

The widening of the band was expected as the value of the yuan fell in February. Many believe that the PBOC pushed for the yuan’s deflation in order to prepare traders for the band move from 1 to 2% daily against the US dollar. The move is also seen as a sign of confidence from the bank. However this move will also force Chinese companies to learn to hedge their currency risks something to look out for in the near future especially since many firms have been close to default.

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One Comment

  1. Thanks, I just posted links on this topic for my China course. (In my first comment I forgot which blog I was on!) I’m copying from myself:

    …the RMB has ceased its gradual appreciation, which the WSJ interprets as an attempt to limit one-sided speculation with another comment here.

    In which direction however would we expect the RMB to move if the PBOC stopped its peg (which would require removing capital controls)? Interest rate differentials? Portfolio rebalancing (the normal returns-adjusted asset diversification motive)? Trade surpluses?

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