China today said its move to widen the daily trading limit of its currency against the US dollar is aimed at breaking one-way expectation of the yuan's appreciation.
“Widening the yuan's trading band against the US dollar is an important policy arrangement for improving the formation mechanism of the yuan's exchange rate and a significant step for the market-based reform of the currency's exchange rate,” the Commerce Ministry spokesperson, Mr Shen Danyang, has said.
The recent move is conducive to breaking the one-way expectation for the yuan's appreciation, cracking down on abnormal foreign exchange movements and creating a more stable environment for foreign trade, he said.
The People's Bank of China, the country's central bank, announced on Saturday that it would widen the yuan's daily trading limit against the US dollar from 0.5 per cent to 1 per cent starting this week.
In the foreign exchange spot market, Chinese banks can exchange the yuan one per cent above or below the central parity against the US dollar announced by the China Foreign Exchange Trading System each trading day.
It was the first time since May 2007 that the trading band was widened.
Despite the dip, the yuan will appreciate against the dollar throughout 2012, although at a slower pace and with more volatility, analysts said.
The central bank set the exchange rate against the dollar at 6.296 on the first trading day, 0.13 per cent lower than on Friday.
“The depreciation indicates that the one-way street of Renminbi strengthening in recent years has probably come to an end,” Duncan Freeman, a researcher from the Brussels Institute of Contemporary Chinese Studies.
The Renminbi or yuan is more likely to fluctuate around a relatively narrow range in the short term, rather than moving strongly in any one direction, he told state run China Daily.
“If the renminbi exchange rate against the dollar stabilises or it depreciates, this will have some effect on trade, although the exchange rate is not the most crucial factor,” Freeman said.