China loosens its grip on currency

A currency analyst says China may be seeking to position the renminbi as the world's reserve currency. [Getty]
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A currency analyst says China may be seeking to position the renminbi as the world's reserve currency. [Getty]

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China relaxes currency policy

Created: 16/04/2012

Last Updated: Mon, 16 Apr 2012 18:26:00 +1000

China has loosened its grip on its currency, letting the yuan move a little more freely against the US dollar from Monday.

The People's Bank of China announced on the weekend that it would let the yuan fluctuate by up to 1 per cent on either side of its trading band.

It was previously allowed to move 0.5 per cent on either side of a price set by the central bank every trading day.

The US and the International Monetary Fund (IMF) have welcomed the new rules, which came as pressures for the yuan to appreciate have eased after recent data showed the country's trade had become more balanced.

Sean Callow, a senior currency strategist with the Australian Westpac Bank, says China may be seeking to position the renminbi to replace the US dollar as the world's reserve currency.

"It definitely means a bigger role for their own currency; they are trying to expand the use of the renminbi around the world, so that's part of it," Mr Callow said.

China has previously resisted loosening controls over its currency because a weaker yuan has made the country's exports more internationally competitive.

"They're actually at least not quite so worried about their own export outlook than might have been a few months ago," Mr Callow said.

"I suspect the fact that they're willing to do this now means that it does open the door for somewhat faster appreciation in their currency."

Mr Callow believes Chinese companies will be increasingly likely to request that contracts be signed in renminbi, rather than US dollars, which should see Australian companies shift their focus from the value of the Australian dollar against the greenback.

"I think Australian exporters need to be more and more aware of how the Aussie dollar is trading versus the Chinese currency, rather than just focusing on the Aussie versus the US, so it'll be a gradual process," he said.

Important step

IMF chief Christine Lagarde described the move on the yuan as an "important step".

"This underlines China's commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate," Ms Lagarde said in a statement.

Beijing's trading partners have long complained that the yuan has been kept artificially low, fuelling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.

Chinese Prime Minister Wen Jiabao acknowledged last month that the yuan had increased by some 30 per cent against the US dollar since 2005.

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