People’s Bank of China (PBoC) announced over the weekend that, effective on April 16, 2012, the RMB daily trading band would be widened to ±1% from current 0.5%. That is, the RMB against the USD can be traded in the interbank market within a 1% band around the daily opening fixing price. Meanwhile the allowable maximum daily bid-ask spread for client trades is also widened, from 1% to 2%. This is the first time the PboC has announced a new trading band since May 21, 2007, when PBoC widened the daily trading band from 0.3% to 0.5%.
For many mainstream economists, the US Treasury and for the French Presidential candidates the RMB is strongly undervalued. So there was mainstream welcome to the flexibilisation announced over the weekend. The expectation, to be sure, was that the Chinese currency would now appreciate faster than it did in the past and hence help improve competitiveness elsewhere.
Widening the RMB daily trading band will help deter “hot money” inflows because it will introduce higher volatility. I think a flexible RMB will make one-way bets more difficult, so that's a good thing, as the currency will find its equilibrium value more easily. I actually reckon that the RMB is now quite close to that equilibrium value, based on our recent estimates (1) and the subsequent real effective appreciation of the RMB.
The RMB displayed greater volatility this morning but steered clear of testing a newly expanded trading band, suggesting investors were comfortable with the current range as Beijing tries to guide the economy through a controlled cooldown. At its weakest point early this morning, the currency traded at 6.3250 per dollar - 0.46 percent weaker than the midpoint and 0.3 percent weaker from Friday's close - just within the previous 0.5 percent limit and well shy of the new 1 percent band that went into effect Monday.
(1) Garroway, C., B. Hacibedel, H. Reisen and E. Turkisch (2012), "The renminbi and poor-country growth", The World Economy, Vo.35.3, pp. 273 - 294, March.